Good morning. Thank you for attending today's Mayville Engineering Company First Quarter Earnings Call. My name is Foran, and I will be your moderator for today's call . It is now my pleasure to pass the conference over to our host, Nathan Elwell with Investor Relations. Mr. Elwell, please proceed.

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 full filing on Form 10-K for the period ended December 31, 2021. We assume no obligation and do not intend to update any such 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 are 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 hand the call over to Bob. Please go ahead.

Thank you, Nathan. Good morning, everyone. Before we begin discussing our results, I want to touch on the retirement announcement we made at the end of March. After more than 16 years leading the company, I decided to retire from MEC on September 30 of this year. The timing of the announcement allows a full 6 months for the Board to complete the search, with the able assistance of Heidrick & Struggles, and ensure a smooth transition. Having successfully navigated the pandemic, today, MEC is in a strong financial position with a positive outlook and numerous growth opportunities in its future. I believe it is the right time for me to step aside and let a new leader to take the reins. Over the past 16 years, we produced tremendous growth and have been recognized as the largest fabricator in the United States by the Fabricator magazine for the past 11 years in a row. More importantly, I've been fortunate to work with and put together an outstanding and dedicated team. I'm confident in the future of the company, and I look forward to ensuring a successful transition in the coming quarters. And as a meaningful shareholder myself, I look forward to watching the company's continued success for many years to come. With that said, let's turn to the quarter. Year-to-year net sales increased approximately 21% to $136.3 million and net income increased 50% to $3.8 million compared to last year. Basic earnings per share increased $0.06 to $0.19 per share. We delivered adjusted EBITDA of $14.8 million as supply chain disruptions that impacted our customers' schedules during the fourth quarter of 2021 merely deferred our volumes into the first quarter. We also continue to recover general inflationary pressures on raw materials, labor and other product content through contractual material…

Thanks, Bob. I'll begin with a look at our first quarter. We recorded first quarter net sales of $136.3 million, a 21% increase over first quarter of last year, which was primarily driven by contractual raw material price pass-through to customers, commercial price increases and improved volumes. Manufacturing margins were $14.9 million for the quarter, in line with last year and inclusive of commercial pricing increases, which were slightly offset by Hazel Park transition costs of $1.9 million during the quarter. Manufacturing margin percentages were 10.9% versus 13.1% in the same prior year period. The decline was primarily due to Hazel Park transition costs and the dilutive impact of material price pass-through to our customers that increase sales but do not impact margin dollars. SG&A expenses were $5.7 million for the first quarter of 2022 as compared to $4.7 million for the same prior year period. The increase stems from higher labor and information technology costs, consulting and professional fees and a return to more normalized spending patterns. For the first quarter, income tax expense was $1.2 million on pretax income of approximately $5 million. Our federal net operating loss carryforward was approximately $18.5 million as of quarter end, which was driven by pretax losses incurred in prior years. The NOL does not expire and will be used to offset future pretax earnings. We continue to anticipate our long-term effective tax rate to be approximately 27% based on current tax regulations. Adjusted EBITDA was $14.8 million for the first quarter as compared to $13 million for the same prior year period. Adjusted EBITDA margin percent decreased by 80 basis points to 10.8% in the quarter, due primarily to the dilutive impact of material price pass-throughs. Basic earnings per share were $0.19, a $0.06 increase over last year. Now let me…

Thank you, Todd. So, while supply chain disruptions persist, pandemic-related problems have stabilized somewhat, and we anticipate volumes on a per day basis will gradually improve as we move through 2022. We continue to build relationships and convert new business opportunities to expand our customer base and the markets we serve. We see meaningful opportunities for growth in our future and believe we are well positioned to address them in the years ahead. All in all, the near- and long-term future prospects look very bright for MEC. As I look towards the last 5 months of my tenure with MEC, I know I will be leaving a market-leading company and well-experienced team that's well positioned for many years to come. Operator, we'd like to open the call for questions now.

Our first question comes from the line of Mig Dobre with Baird.

It's Joe Grabowski on for Mig this morning. Your Q1 sales were well ahead of our expectations. EBITDA margin was about in line with what we were expecting. You maintained your guidance, which makes sense after only 1 quarter. I was wondering how Q1 compare to your own internal forecast and expectations.

Well, I guess, from an internal standpoint, I think we met our internal expectations. I think, from a sales standpoint, we probably started the year expecting to see material price adjustments going down a bit from where it ended the year, and it did modestly, but perhaps less so than one would imagine. So we performed as we expected. And Todd, maybe you have some additional color to add to that?

No, I would just kind of mention that the material pricing was kind of in line with what we expected in the first quarter. And as Bob mentioned, certainly demand -- end market demand remains strong, and we met our internal expectations.

And maybe asking about those material pricing pass-throughs, we did see steel pick another kind of leg up in the first quarter. Just wondering how the pass-throughs worked in the first quarter and kind of where you're at as far as any maybe lags that might have existed in the quarter.

I think, we did -- we adjusted as needed. And as the market changed, we adjusted with it. Ryan, maybe do you have a comment further on that?

And Joe, just to reiterate, those are generally kind of addressed at a macro level on a quarterly basis. So, coming out of the fourth quarter, which is really the peak kind of a slow decline in steel prices over the quarter, it did bounce back up a little bit with the conflict going on in Europe. But as we look ahead in the future, that will soften up again. So we'll continue to maintain our activities when it comes to material price adjustments with the customer. The lag last year, really there was a really sharp steep trajectory that happened this year. There will be some softening mainly as we go into the second quarter, the way the contracts work and then likely some modest increases that would occur again in the third quarter.

And then, my last question, maybe drilling into commercial vehicle. Class 8 truck orders have been quite negative in the past 6 months. Production has also been negative, but to a lesser degree. Backlogs are still up year-over-year. I guess, what are you hearing from your Class 8 customers regarding demand for your products going forward over the next couple of quarters?

Yes. I mean, we still -- our outlook is still strong demand. When we think about this sequentially coming out of early fourth quarter of last year where we saw more severe supply chain disruptions, the first quarter certainly got much better. I think, the question now is how can build rates be increased more so than already above weeks or days out of the schedules due to part shortages and things like that. So, you're correct that overall net orders are down, but I think that's also what the backdrop of a backlog that's pretty full through '22, and OEM is really limiting their ability or limiting the order intake. So, there hasn't been anything from our side that would lead us to believe there is any softening in the overall market. The backlog remains strong. OEMs still have the desire to increase the daily line rates.

Our next question comes from the line of Larry De Maria with William Blair.

As it relates to Hazel Park, when might we get some tangible announcements on the filling of that space? Kind of curious about the ramp in the second half and into next year. And you maintained your guidance, but now we have some business going into Hazel. So, are we assuming some of the base business is softer and Hazel picks up some of that weakness? How are you thinking about that?

The way we're thinking about it is, the work that we're moving there has already been launched. So, the launch risk has been very mitigated, and we're creating additional capacity then in those locations that need the additional capacity for their key customers. So we're mitigating some risk, but we're also growing that capacity. Over time, as experience happens, we'll get some more direction there. And we can talk more about it quarterly, but it's going in the right direction. We're pleased with our progress, and more to come.

So, are there specific numbers we can point towards second half Hazel in terms of maybe absolute dollars or something like this? And is there still potential for upside this year in Hazel with new wins or is that more likely in '23?

Yes. It will be a ramp year this year in the second half. So, I think the benefits will come in '23.

And then, you talked about having, I guess, decent visibility on the cash repayment from the fitness customer. Can you just maybe delve into that a little bit more? Is that likely to occur this year? How confident are you? And just help us understand the outlook there.

I think, the right way to put it is, we're actively working on that with them. And there's not a lot of commentary we can add around that at this time. But as information is available, we will certainly update everyone on that progress.

Last question, the military outlook you've kind of called out as being positive. Can you just give us some general trends and direction on that, maybe growth rates or dollars, over the next few years? Is that -- have we hit a base level that's -- we're going to grow from that's maybe countercyclical to the possibility of recession that we're starting to factor in?

I think, Larry, going back into 2019, even during COVID, the military market has been a very stable one for us. Right now, we're in the process of doing some updates on customer vehicles that's allowing us to grow some share. So there is some incremental revenue that's happening in that space. And then, long-term, we also feel positive with our customers. They've won some more substantial contracts with the government that we feel will also be participating with them as they get into the launches kind of looking out indefinitely 2023 should give us some more opportunity to grow in that space in the years to come.

When you think about it, Larry, I guess we're not just taking what we have and going with the market. We're getting new business, we're getting new market share, and those things certainly help that picture no matter what.

There are currently no further questions registered . We have a follow-up question with Larry De Maria from William Blair.

As long as there are no more questions, I'll ask 1 more. Just maybe on the powersports, again, similar to the question on the military and the possibility of a recession, how do you think this plays out?

Yes, Larry, I don't know if you continue the question, it kind of sound like you're cut off there at the end. But, in powersports, one thing we are watching is -- in interest rates is that financing side of that could have some impact on the volumes. But as we follow our customers, and we're in side-by-side with ATVs, the marine boating industry motorcycles, the inventory is down, still about 70% from COVID overall as an industry, very solid backlogs there. Most of those units being presold. So, a strong outlook at the OEM level. Even some of the OEMs going so far to say they probably won't even be able to restock inventory until the 2023 time frame. So, as long as retail holds up and, I'll say, interest rates, it don't have a rapid increase. We still believe retail demand will be very strong, and there'll still be a need to restock at a dealer level that definitely looks good from a medium to long-term in powersports. Well, I guess, with that, I think we'll wrap it up for the day. Thank you for your time today and your continued interest in MEC. We look forward to seeing you in person at the William Blair Conference next month in Chicago. Thanks for joining our call today.

This concludes the Mayville Engineering Company first quarter earnings call. Thank you for your participation. You may now disconnect your lines.