Good morning, and thank you for attending today's Mayville Engineering Company 2022 Earnings Conference Call. My name is Daniel and I will be your moderator for today's call [Operator Instructions]. I would now like to pass the conference over to our host, Nathan Elwell. Nathan, 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 21(a) 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, and our actual results could differ materially from those in the forward-looking events. For more information regarding such risks and uncertainties, please see our filings with the Securities and Exchange Commission, including our filings 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 Jag Reddy, President and Chief Executive Officer; Todd Butz, Chief Financial Officer, Rand Stille, Chief Operating Officer and Ryan Raber, EVP of Strategy, Sales & Marketing. Jag will begin with his thoughts on the quarter and the end markets we serve, new business and future plans, followed by Todd, who will review the financial results and guidance. Please note that accompanying slides are available via the webcast and on the Investors section of the company's website at mecinc.com. With that, I'll hand the call over to Jag, please go ahead.

Thank you, Nathan, and Good morning, everyone. I'm on Slide three. Our team executed effectively this quarter, producing strong improvements across the board. Net sales grew approximately 25%. Adjusted EBITDA increased approximately 61% and our net income increased significantly when compared to the third quarter of 2021. The improvements were primarily driven by volume growth, commercial pricing increases and better absorption of manufacturing costs. I am pleased to report that we commenced production at our state-of-the-art facility in Hazel Park, Michigan during the quarter as planned. Additionally, I am excited to announce that we launched MEC Business Excellence or MBX, to drive operational and commercial excellence. I believe this will be a game changer for MEC and we'll discuss this in more detail. We are refining our full year guidance that was originally provided in February, which Todd will discuss later. After 100 days, I wanted to share some of my observations and reflections as summarized on Slide four. I had the opportunity to visit all 18 of our manufacturing plants and have met with hundreds of our team members across the organization. I have also met with many of our customers and learned more about how vital MEC is to their ongoing success. It is clear to me that we are an integral part of our customers' future expansion plans. Through my site visits and meetings with our customers, I have identified the following observations as key to our future success. Our company culture is a direct result of our hard-working employees taking great pride in their work to support our customers' needs. This has deepened relationships with customers and enabled us to grow profitably in recent years. Additionally, the secular trends of reshoring and outsourcing have been confirmed by our customers. Our investments in automation will support cost…

Thanks, Jag. I'll begin with a look at our third quarter, which is summarized on Slide 10. We recorded third quarter net sales of $136.3 million, which is a 25% increase year-over-year. The increase was primarily driven by improved volumes due to the overall strengthening of the business, commercial pricing increases and contractual raw material price pass-through to our customer. Manufacturing margins were $15.5 million for the quarter as compared to $10.9 million in the prior year period. The increase was driven by improving demand, improved absorption of manufacturing costs and commercial pricing increases. These improvements were partially offset by a downward shift in scrap income, Hazel Park launch cost, continued customer supply chain issues during the quarter. Manufacturing margin percentages were 11.3%, which is a 130 basis point improvement over the 10% recorded in the prior year period, despite some of the challenges previously mentioned. SG&A expenses were $6.5 million as compared to $5.3 million for the same prior year period due to higher consulting and professional fees, CEO transition costs, as well as continued inflationary pressures on wages and benefits. For the third quarter, income tax expense of $1.5 million on pretax income of approximately $8.1 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 increased to $16.1 million versus $10 million for the same quarter last year. Adjusted EBIT margin percent increased by 260 basis points to 11.8%, representing an incremental margin of 22.5%, which is consistent with our historical average. If we remove the impact of…

Our recent performance and current outlook of the business remains positive. As we manage the demand trends, we are seeing across our end markets. However, we are monitoring market changes, staying in constant communication with our customers and will be ready to adapt as needed. We are maintaining and expanding the relationships we have with some of the best blue chip companies in the world and are pursuing numerous opportunities with potential new customers and new end markets. We're focused on profitable growth into new platforms, margin expansion with lean initiatives and innovation to drive competitiveness. We are off to a great start, and I'm very excited about the future of MEC. With that, operator, we would like to open the call for questions now. Thank you.

Thank you. [Operator Instructions] The first question comes from Vlad Bystricky from Citigroup. Please proceed.

Good morning, guys. Thanks for taking the call. So nice quarter end results and thanks for some of the strategic outlook or update, I should say, around some of the long-term priorities and what you're doing with MBX. I guess just thinking about MBX, can you maybe give us more color on how you're going about implementing MBX, whether you have the talent and skill you need to sort of drive this more focused approach and wider approach it seems to lean and just how you're thinking about the runway for MBX driven improvements to manifest?

Yes, sure. I'll take that. I'll start with my comments Vlad, and then I'll pass it on to Ryan to expand on our implementation. MBX is critical and vital for our profitable growth future. Even though, as I mentioned in my prepared remarks, MEC has historically used lean tools. MBX program, with this dedicated team across our network, will bring sustainable implementation of our programs. We're going to accelerate the number of Kaizens. We have dedicated teams in the plans right now that are going to drive these Kaizens and we're utilizing not only internal but also some external resources to offset short-term strength for the MBX team. I'm going to pass on to Ryan to expand on implementation.

Yes, Vlad, thanks for the question. Again, many of these tools we've been using for quite some time, but it's the acceleration that Jag talked about. And so with that acceleration, we've dedicated a team fully committed to MBX. So we have a team of lead engineers led by our Vice President, focusing making sure we're driving as across all aspects of the company. So it's just an acceleration and I'll say hyper-focused upon what we are doing in the past. And so we do have those skill sets, and we have those capabilities. So we feel very confident about the impact that this is going to have across the organization.

Okay, that’s helpful. And then maybe just a follow-up for me. I know you're not guiding to '23 yet. But as we think about the outlook into '23 here, if I just look at sort of the end market industry outlook, obviously, some mix trends there and obviously concerns about the macro. So, I guess, can you just talk about given your work on new wins and reshoring opportunities, et cetera, how you're thinking about the potential or the likelihood of being able to drive growth if we are going into sort of a broader macroeconomic slowdown here in '23?

Sure. Let me take that, and then have Todd chime in as well. Generally, it's been right. We think about the business in two ways, right. One is the base business we currently have, right. That's in 2022. And then the new growth opportunities we have won that will also start up in 2023. Before I actually do that, let me say that we're not providing any guidance for 2023 yet. We'll obviously provide that guidance at the appropriate time. But given the uncertain times we have, I think it's helpful for us to think through this way. So the base business, right, every -- almost all of our customers today are indicating the volume growth next year, right. But we're also -- many of those customers are publicly traded companies that many of you follow. And we're seeing the same information that is publicly available today. So that indicates that there is some growth next year from the base business. But at the same time, right, we're taking into consideration all external factors. And if we assume even a small pullback on the demand in the base business, we feel that we have enough new business that's coming into 2023, that could offset that potential softness in the base business. So unless markets turn significantly and a deeper downturn, then that's a different discussion that we can have at that point. But sitting here almost in Q4, we feel pretty good about next year and we're thinking about it in terms of base business versus our new business.

What I would add is certainly that we're not providing guidance at this point, right. We will when the time's appropriate. But to Jag's point, as it stands today, volumes in markets generally look solid for next year. And with that, with the MBX launching, the pricing carryover, and activities that happened in 2022, hopefully, supply chain kind of balancing and getting corrected at our customers will lead to a higher net income. Our expectation for next year would be bettering income, better EBITDA. And along with that, significantly improving the free cash flow. When Jag spoke earlier, $20 million to $25 million in normalized CapEx, inventory levels because the supply chain issues are a little high right now, so we would expect turns to get better as we move into 2023. And as the steel pricing has come down. So in a general sense, we feel very positive about next year. We're really not ready to provide guidance at this time.

That’s understable. So, really helpful colorful. Thanks guys. I get back in queue.

Next question comes from Mig Dobre of Baird. Please proceed.

Thank you for taking the question. Good morning, everyone. Sticking with this last comment maybe as we're looking at margins and Todd, I appreciate that you expect improvement here. But if we're looking at the fourth quarter, can you comment at all as to how you see the manufacturing margin, your gross profit evolved sequentially? And as I'm thinking about 2023, if we're in an environment in which volumes are at least stable and it sounds like some of the cost pressures are at least starting to moderate, if not outright reverse in some cases. Is it fair to expect the manufacturing margin to recover to more normalized levels, something like, call it, 2019 type levels?

I expect that to be above 2019 levels, quite frankly. We're already provide -- our low end of our guidance is a record in comparison to 2019. So even with, let's call it similar or slightly less volume this year because of material price pass-throughs compared to 2019, we're delivering record EBITDA. And it's why we over performed in 2019 by more than 10%. So my expectation is at this point that our margin profile will continue to look better than 2019. Now when we think about Q4 and why we kind of narrowed our guidance, we do have rising interest rates, we have continued expected supply chain issues with our customers and there's potential for some legal costs in the Q4. Outside of that, we have holidays, certainly. We expect maybe customers may take a day or two on the schedule because of the supply chain issues on their end. But as we get into '23 and these things alleviate, we all feel very confident that we can deliver, again, improved results, but not only that, but hit our 15% adjusted EBITDA goal.

Understood. And then this industry outlook slide you provided is very informative. I am sort of looking to clarify something, and I apologize if I missed this, but as you're framing the 2023 market outlook, this is -- what you have on this slide is your interpretation as to how these end markets will progress in terms of either acceleration or deceleration? You're not really seeing yet any declines in production levels from your customers in areas like powersports and construction equipment, is that correct? Do I have that interpretation correct?

Yes. That's exactly right, Mig. This is absolutely, the 2023 outlook here is our interpretation of how it might turn out. But as I said earlier, most of our customers are not indicating any declines. They're all being reasonably stable or bullish in their outlook so far. But we're being realistic and that we're internally saying that, hey, the market softens, that's in our base business. This is how it would look like and where are the areas that might be soft. That's what we're trying to communicate here. But having said that, also when I add that even in powersports, we have new business that we're going to be producing next year, new customers and new programs. So even in an industry that might be softening, we feel like we have new business to offset the potential softness. And I'm going to ask Ryan to chime in.

Yes. I think, Jag, generally, right now, we still see a macro trend of the majority of the industries having relatively low inventory compared to retail demand. And certainly, in the short-term, there is some refilling of the pipeline that needs to take place. As we look out into '23, certainly, the rising interest rates have had an impact on residential construction and other things affecting the construction and access equipment, and also see things like strong rental CapEx and good signals from our customers about aged fleets that are in rental fleets and other things that I'd like to think could provide some potential tailwinds, but still too early to call that into '23. Powersports, like Jag said, certainly new business coming online. We generally feel like we'll be playing the powersports more in the high-end premium product, which has some independence from interest rates when you think about the interest rates affecting that discretionary income, those buyers might have. So as we look to next year's interest rates, we believe, will have an impact. It's hard to quantify that inventory and the need to restock. But going back to the initial comment, customers are generally sending strong demand signals that year-over-year, we believe, would be flat to up. We'll continue to monitor that as we go into '23, and we remain very in our ability to convert new business and show some incremental growth as we go into next year.

Understood. That makes sense. Last question, maybe one on M&A and capital deployment. You mentioned some new technologies here that are of interest to you, plastics and aluminum. And I'm kind of curious if you can expand on that. I mean, are you looking to get into things like injection molding and the like? And I guess I'm curious also in terms of what you perceive to be sort of the competitive edge or core competency of Mayville. I, for one, have always thought of it as metal fabrication. But Jag, it seems to me like you're thinking more broadly than that, which obviously has strategic location for the company.

Yes, thanks Mig. When I first came in, right, and the first time as we looked at, what do we do well. We help our customers produce the best products at a very competitive price, and we have the footprint and the supply chain capability to support short lead times to these customers. So if you take that premise and then say, what else can we help our customers with and what are the problems or pinch points that customers are facing right now? We're now going to be product designers. But we do a lot of design partnerships with our customers as they were trying to go from a design phase into manufacturing phase. Design for manufacturing, all of those services are an important piece of our offering. We don't do a lot or definitely, we don't commercially price those activities today. And that's an area where customers, as I talk to them, many have indicated that they're struggling with engineering talent. They're struggling with lead times to market. So all of these areas will help our customers to speed up their design to manufacturing, speed to market. So even services, prototyping services are important element where we can really help our customers. Similarly, as we think about energy transition and customers going to EV platforms, the lightweighting in general, even for ICE engines, lightweighting is really important. We're generally a steel fabricator. Many customers are asking us for other areas where we could help them given our performance and given our long-term partnerships with these customers. Some of the customers asked us about aluminum, right, hey, guys, can you do aluminum fabrication? Well, that's not an area today we focused on. We have some offerings, but not a lot. So that's another area we think that is really beneficial for us to enter into particular aluminum fabrication in the long run and then we can support our customers. And then beyond that, we have gone into -- so, this is something that I learned. I did not know on day one, but certainly, as I was going through a lot of our plans, I learned, we do a lot of subassemblies. We do cable assemblies. We actually put together metal components with plastic components. So as I looked at all of that, we said, look, we can get into more value-added services such as subassemblies and assemblies, and perhaps instead of buying some of those plastic components from a third-party supplier and something in-house, we can also get into that. So that's how we're thinking about, right, how do we expand our offerings? How we further support our customers' growth? And that's the reason why we feel like we have the right to play in those adjacent markets, and that's where we're refocusing our efforts into M&A.

Very interesting. Thank you for that.

There are currently no additional questions registered at this time [Operator Instructions].

Okay. Well, thank you, everyone, for your time today and your continued interest in MEC. We look forward to speaking with some of you at the upcoming Baird and Sidoti conferences.