Good morning. Thank you for attending today’s Mayville Engineering Company Second Quarter 2024 Earnings Conference Call. My name is Tamiya, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Stefan Neely with Vallum Advisors. You may proceed.

Thank you, Operator. On behalf of our entire team, I’d like to welcome you to the Mayville Engineering second quarter 2024 results conference call. Leading the call today is MEC’s President and CEO, Jag Reddy; and Todd Butz, Chief Financial Officer. Today’s discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainty, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliations of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.

Thank you, Stefan, and good morning, everyone. Thank you for joining us today. During the second quarter, we continued to demonstrate strong strategic execution, which drove robust net sales growth, margin expansion and free cash flow conversion. During the quarter, our team successfully executed on new project startups in our commercial vehicle and powersports end markets. These new projects drove nearly 7% year-over-year organic sales growth, well above the growth trends in our end markets. Our team’s continued focus on implementing our MBX lean initiatives drove $0.9 million of year-over-year self-help adjusted EBITDA improvements during the second quarter. Since the beginning of the year, our structured approach to operational excellence and lean manufacturing has resulted in approximately $2.5 million of sustainable year-over-year margin improvement. As we move into the second half of the year, our team’s continued successful execution on key commercial growth and operational excellence initiatives combined with improving utilization at our Hazel Park facility will be important catalysts for outperforming our end markets. While customer demand remains steady throughout the first half of the year, our customers’ outlook for the second half of the year has softened in a few of our key end markets. However, with our robust strategic execution combined with our market share gains, we continue to expect that we will deliver growth for 2024. With that in mind, we are reiterating our 2024 financial guidance for net sales and adjusted EBITDA, which projects full year net sales growth of between 5% and 9%, and growth in adjusted EBITDA of between 9% and 15%. As it relates to free cash flow, our strong performance in the first half of the year has outpaced our expectations. As a result, we are increasing our expected full year 2024 total free cash flow guidance to between $45 million…

Thank you, Jag. I’ll begin my prepared remarks with an overview of our second quarter financial performance, followed by an update on our balance sheet and liquidity. Total sales for the second quarter increased 17.7% on a year-over-year basis to $163.6 million. This increase was driven by a combination of the MSA acquisition, strong strategic execution and continued organic sales growth, partly offset by ongoing softness in our legacy agricultural end market and the expected roll-off of certain military aftermarket programs at the end of 2023. When excluding the MSA acquisition, organic net sales growth was 6.9% on a year-over-year basis. Our manufacturing margin was $22.3 million in the second quarter, as compared to $15.1 million in the same prior year period. The increase was primarily driven by organic volume growth, execution of our MBX lean manufacturing initiative, commercial pricing and the acquisition of MSA. Our manufacturing margin rate was 13.6% for the second quarter of 2024, as compared to 11.6% for the prior year period, for an increase of 200 basis points. Other selling, general and administrative expenses were $8.3 million for the second quarter of 2024, as compared to $7.4 million for the same prior year period. The increase was primarily driven by an additional $500,000 of legal expenses relating to our former fitness customer, incremental expense associated with MSA and increased costs related to compliance requirements. Interest expense was $3 million for the second quarter of 2024, as compared to $2 million in the prior year period due to higher borrowings under our credit facility. The increase in borrowings is due to the acquisition of MSA, which closed on July 1, 2023. Our focus on reducing our debt leverage, combined with strong free cash flow through the second quarter of 2024, has allowed us to achieve our…

[Operator Instructions] The first comes from Mig Dobre with Baird. You may proceed.

Thank you. Good morning, everyone, and congratulations to the team on a really good performance in a choppy environment. So that’s great to see. I guess my first question is on the free cash flow guidance, and Todd, maybe you can help me better understand what prompted you to raise that guidance, even though the other elements have stayed unchanged. Is this just a function of kind of converting some of that inventory into cash? Are there any other important capital items for you to be aware of?

Good morning, Mig. I’m going to quickly pass on to Todd here, but I just want to reiterate that, our sustained efforts in continuing to drive MBX across our enterprise, that’s in both operations and the rest of the functions, and driving better days in payables, better days in receivables, inventory reduction, better forecasting, SIOP implementation, all of these actions that we’ve been pursuing for the last year and a half has shown in the first half what the power of MBX is and that is really what gives us the confidence to raise our guidance for the year.

Yeah. Good morning. To Jag’s point, it really is driven by the MBX initiatives. I mean, if you look back 12 months, 18 months ago, we were at 6 times or terms, rather. Today, we’re at just over 9 as we finish second quarter. In addition to that, we’ve been working very hard on our terms and conditions with customers, our collection efforts. I mean, across the Board, it’s been very, very positive. So, when we looked into the back half of the year, which, historically, the Q4, our fourth quarter is one of our strongest cash flow quarters, we do expect now that, again, being that range of $45 million to $55 million, and that’s why we feel confident that we can achieve that, and therefore, we raise the guidance.

But, again, looking back historically here, I think in 2021, we had a big cash drag from an inventory build. I’m kind of searching through my memory here. I think that might have had something to do with challenging supply chain and all the disruptions that existed in the industry at the time. I guess my real question here is, is there room to improve on the performance that you’re delivering this year? Should we expect another, you name it, $5 million, $10 million worth of potential release of working capital as we go forward?

So, when you think of 2021, it was supply chain. We were also building inventory for the expected launch of our former fitness customers. So, a bit of a unique situation there.

Right.

As we move forward, definitely this year, we do expect to unlock continued working capital, whether it be through receivables, payables, our payments, as well as inventory. But I will note that that rate of progression will moderate a bit when you think of going from 6 times or 6 terms rather than 9. There’s a lot of, let’s say, low-hanging fruit that we get after going from nine to 10 or 10 to 11 is a little more difficult. Now, we still remain confident we can achieve that, but it’ll take a little more time to do it. But in the near-term, we do expect in the next six months that we’ll continue to see good working capital progression and favorable free cash flow.

Okay. Okay. Two questions on end markets. I guess the first one is on commercial vehicle. In your prepared remarks, Jag, you talked about the setup here into the third quarter and the fourth quarter. But as I understood it, you said that you still expect to be flat year-over-year from a revenue standpoint in commercial vehicle. I’m curious as to what gives you the confidence that you’re going to be able to hit that guide and I understand that you outperform relative to build by about double digits in Q2. But the degree of outperformance, especially as we look into Q4 relative to build, would be much more significant than what you’ve done thus far. So is it that these customers are ramping through the year, these new contracts are ramping through the year, or is there something else to be aware of here?

Yeah. On commercial vehicles, the first half, our customer builds outperformed our expectations. And we do expect the second half to slow down, our customers to slow down their build rates and that’s what we have planned from the beginning. Our confidence in hitting our forecast for second half really relies on our customers’ build rate projections and ACT forecasts of 308,000 vehicles for the year. Given that, even though we do expect some softness in the deceleration of build rates, given our new program launches and some of the share gains we’ve been talking about, those increased sales to our end customers gives us confidence that we can hit our forecasted targets.

But to be clear here, you expect to be flat revenue in commercial vehicles even in the fourth quarter on a 23% build decline?

Let me reiterate, we expect to be flat for the full year in 2024 to 2023 results in our CV market.

Okay. Thank you for clarifying.

Yeah.

And then finally, on agriculture, you already mentioned that large agriculture is under pressure. I think small ag is under pressure as well. There’s…

Yeah.

… pretty material production costs that are coming across from older OEMs, somewhere in the high 20s, low 30s in some cases. So I’m sort of curious here as to how you think about this vertical specifically, especially as you differentiate between Q3 and Q4, because the pressure on build rates seems to be varying between these two quarters by OEMs. So based on your customers, I’m kind of curious as to how you think about progression here. Thank you.

Yeah. That’s a good question, Mig. We expect the overall ag market to be down mid-teens based on the programs we’re on and the visibility we currently have. That breaks down approximately 15% or so for large ag and approximately 10% or so for the small ag. That’s for the end market. For us, we’re currently projecting we’re going to be down for the year approximately 5% overall. That’s because of some share gains we talked about. There is also a lapping of some MSA ag revenues that came into the first half. You put all of that together, year-over-year, we will be down approximately 5% in the ag end market. But also let me remind you that, you know, overall ag is only 9%, approximately 9% to 10% max of our overall sales. It is still one of our smaller end markets, slightly larger than our military market, which is approximately 6%. So even though the headlines -- we see the headlines, we read our customers’ public comments, but given where we are in the cycle, given our program wins, given our share gains, we feel like we can continue to outperform the agriculture end market.

I appreciate it. If I can squeeze one more, I’m sorry. On the military, just as a quick reminder here, is your exposure in military predominantly on the JLTV or are there other programs that you have in there as well? Thank you.

Yeah. So we have JLTV, FMTV are the two main programs we’re on.

Great. Thank you. Good luck.

Thank you.

Thank you. The next question comes from Ted Jackson with Northland Securities. You may proceed.

Thank you very much.

Good morning.

Congrats on the quarter, guys.

Okay.

I got a handful of questions. I’ll try to run through them really quick. First of all, on the commercial vehicle, when you were giving the market data for growth, I caught the 11% growth with regards to 2026, but I missed what you said for 2025. Can you -- do you have that in your head…

Yeah. We expect…

… Jag?

Yeah. Yeah. We expect 2025 to be approximately 1% up versus 2024.

Okay. And then when I think about that, I mean, that’s market data, you would expect at a minimum to grow in line with market. So I’m not saying that that’s your guidance. I’m just saying like, if the market data and the projections hold true, that it would stand to reason that you would expect to see some modest growth in commercial vehicle in 2025.

Yeah. Obviously we’re not providing any guidance for 2025. With that caveat, we expect to outperform the commercial vehicle market in 2025.

Okay. My second question goes over into the powersports market. I mean, you’ve just nailed it there. I mean, it’s the markets, as weak as anything you could imagine, and the project wins for you, it really allows you to pull through on that. When we finish off this year and get into 2025, I mean, what -- is there more stuff that would allow you to continue to, let’s just call it, outperform market. I’m not going to ask for you to talk about market share kind of market growth and stuff. But would you view 2025 of being an arena where you would grow more in line with the market or is there still some tail from all the new activity that you brought through your business in 2024 that were carried forward into 2025 and allow you to continue to say grow faster than that market in aggregate?

Let me first step back…

I’m asking because you’ve been ramping -- you’re ramping a lot of this stuff…

Yeah.

… through this year and kind of like, how does it tail into 2025 is where I’m going with this.

Yeah. So the discretionary nature of significant spend in the market and interest rates have had an effect on customer purchases. At the same time, our customers have built up significant inventory in the channels as well. It’s been a really great first half for us in powersports market as we ramp up new customers. We do expect the second half to moderate a bit our growth rates in the market. We will still grow and outperform the market. It’ll be interesting to see what happens with interest rates and channel inventories with our customers as we go into 2025. There is a good possibility that we will outperform the market even in powersports next year. But sitting here, it’s a little challenging to predict, right, how that is all going to play out given the interest rate environment we’re currently in.

Yeah. I mean, I listened to all those calls and there’s -- I mean, the new product stuff they talk about is nice, but the market itself is just horrible. A question that I think will come close to your heart, Jag, and maybe somewhat fun. I want to maybe to have you unpack a little bit about where you are in your journey for value based pricing. I mean, it’s -- you highlighted a lot. You’ve talked about how it’s improving your margin structure. So if we think about MEC and the revenue base that it has, maybe like, how much of your revenue have you converted over to this new pricing model And how far can you take it, I guess, kind of what do you see it in terms of the trajectory as we roll through 2025 and beyond?

As we indicated last time, Ted, probably, 15%, maybe less than 20% of our total sales are probably under the quote-unquote new pricing regime, i.e., value based pricing. So what that gives us is a good three-year to four-year to five-year runway to continue to convert existing core business to the new pricing model. So it’s going to have some legs at the same time, right? It’s going to take some time as well, and it’s both positive as well, given that we can continue to leverage our pricing for the foreseeable future.

Okay. My last question for you all is just maybe an update on the sports equipment litigation kind of where are you with regards to that process? Maybe any change in terms of how you see it in terms of its resolution? Just kind of an update on that front. Thanks.

Sure. The discovery process continues with the litigation and we expect the discovery phase to conclude in Q3, and anticipate potentially a trial to begin either later this year or early 2025. We remain confident in a positive outcome for MEC. Beyond that, we will not comment on the pending litigation.

Okay. Great. It was worth asking. Congrats again on the quarter. I’ll talk to you guys soon.

Thank you, Ted.

Thanks, Ted.

Thank you. The next comes from Ross Sparenbleck with William Blair. Your line is open.

Good morning, Ross.

Good morning, Ross.

Ross, your line is open. Please ensure you are unmuted. The following question comes from Natalie Bach [ph] with Citigroup. You may proceed.

Hi. Good morning.

Good morning.

Congrats on the quarter. This is Natalie Bach on behalf of Andy Kaplowitz from Citigroup.

Good morning, Natalie.

Good morning.

So, my first question that I want to ask is, with leverage now at 1.7 turns and you raising your fee cash flow guidance for the year, how are you thinking about the potential for incremental M&A activity? And what impact does recent market volatility and current macroeconomic uncertainty have on how you and the board think about M&A in the current environment?

Yeah. It’s a really good place to be, Natalie. We are ahead of our schedule on our debt repayments, and as interest rates are working in our favor, as we indicated, 30 basis points of interest rate reduction in Q3 for us, given our leverage ratio, and potentially future interest rate cuts by Fed gives us confidence that we can continue to pursue our capital allocation strategy. As indicated in our prepared remarks, we will put together a structured buyback program as well, as we continue to reengage with potential M&A targets. Our pipeline remains strong and we continue to stay close to the market. Given that the multiples have remained consistent, we expect to pursue some attractive targets in our adjacent markets to beef up our offerings to our end customers, either in lightweight materials, energy transition and other attractive end markets that will also help us with the diversification in our end markets.

Okay. Helpful. And then just toning in on your construction and access end market, can you remind us of your mix of exposure to resi versus commercial construction equipment, and how are you thinking about trends in resi versus commercial impacting your outlook for the constructional portion of your business going forward?

Yeah. I don’t think I can break down on the call resi versus infrastructure. We have not given that breakout in the past. Having said that, our access versus construction is approximately $45 million to $55 million. That’s the breakdown. In construction, though, we are seeing some modest signs of growth in our resi exposure to market. And infrastructure, particularly the government and public infrastructure, could be a tailwind in the second half of 2024. But we need to watch our OEM inventories in the channel and then see how that continues to translate into sales and production for our end customers. Access market, though, continues to be strong. Our access customer has strong backlog, which we expect to support our 2024 forecast.

Very helpful. And then just focusing on powersports, can you just talk about what you’re seeing and hearing from more of your consumer-facing customers in the end market?

All of our end market customers have both consumer-facing products and also what we call utility products. The utility demand has been stable and strong. We have gotten on new platforms and programs with multiple customers. As we discussed last time, we brought on some new customers to MEC this year. All of that is helping us stabilize and grow in this end market with a pretty sizable contraction in actual end market sales. We see that discretionary spend, i.e., the recreational side of the market, continues to be soft and our customers continue to have excess inventory in the channel. We all can see the marketing programs that are running to clear the inventory channel, sorry, channel inventories. So we’ll have to see how it plays out. And our expectation is that if there is any movement in interest rates in the coming quarters, that will only be a tailwind for us, either in 2024 or going into 2025.

Okay. That’s helpful color. And then one last question for me. You mentioned how the continued ramp-up of new project work should help offset some of the expected softness in the few end markets in the second half. Maybe can you talk about how these new projects should help flow through the P&L over the coming quarters and how we should think about that potentially impacting topline and reported profitability over the next few quarters?

So, when you think about the markets, right? We’ve said on the last call, we’ve made significant gains in powersports. We’ve made significant gains in PV, which will, again, offset or mitigate some of the declines that we’re seeing on the end market demand. On the topline, given that CV is 38% of our overall sales, we do expect sequentially, going from second quarter to third quarter, we will see about a 6% to 8% decline in topline revenue versus a 20%-plus decline in that CV market alone and then when you look at Q4, more of a modest decline, maybe 1% to 3%. From a P&L perspective, the fundamental building blocks that we’ve put in place already as it relates to MBX, other lean initiatives and commercial pricing are there. And you can see the results in Q1 and Q2 to have a very positive impact on our bottomline financial performance. But as you enter the second half, given that CV does have a pretty sizable downturn, that will impact some of our larger facilities. So we will have a little bit of a tempered margin progression in the second half as these facilities will be slightly underutilized due to overhead absorption. But generally speaking, when we think about margin progression in our 14% to 16% goal, we feel we have the pieces in place to build upon to continue margin progression even in a down market, albeit it will be very tempered, I would say, in Q3 and Q4.

Okay. Got it. Very helpful. Congrats on the quarter and thank you for taking all of my questions.

Thank you.

Thank you.

Thank you. The final question comes from Ross Sparenbleck with William Blair. You may proceed.

Hey. Good morning, guys.

Good morning, Ross.

Good morning, Ross.

All right. You can hear me. Apologies for technical difficulties there. Maybe sticking on the margins, as we think about kind of the second half, maybe a little bit softer on the end market, but you have done excellent work with MBX. What would expectations be for maybe decrementals, given the work that has been done, if it’s maybe a little bit worse than expected in the second half of the year?

No. I wouldn’t characterize -- I think the decremental will be a little bit -- our historical decremental is around 17.5%, and I would say that, we’re at or maybe slightly below that as we stand today. I would expect and we do expect to continue to see the positive impact of MBX and commercial pricing and other initiatives in the second half. But like I just mentioned, that will buffer -- be mitigated by, unfortunately, the pressure of underutilization at a few of our larger facilities. But generally speaking, I would expect margin progression to continue in Q3 and Q4, but at a much lower pace than what we saw from Q2 to Q3.

Just to add to that, Ross, we are actively looking at all the levers we have at our disposal as we expect the volumes to come down, particularly in some large facilities and significant operations. We’re looking at every lever, including cutting back on overtime, really following strict checkbook processes to make sure that our variable spend is down. We’re looking at resizing our workforce in a couple of our facilities that are either seeing or expected to see some significant volume reduction. So, we’re taking all the actions necessary for the second half for us to continue to drive the revenue and margin progression as we laid out.

Okay. And maybe just on capacity, when we think about access, I think maybe there’s $10 million left to go get at Hazel Park. But just company as a whole, where do you guys stand today and how should we frame all the wins in the second quarter, as you know, contributing in the next four quarters to revenue, trying to support that?

Yeah. So, the first point I would add is, we’re continuing to make good progress with the ramp up of Hazel Park. That gap that you highlighted, we continue to work that gap down. The pipeline that our sales team has developed is really strong and we are continuing to focus on closing those opportunities to be able to add to that gap that you mentioned. So, sitting here, we feel pretty good about our exit rate out of Hazel Park in 2024.

Perfect. And just one more, if I can, on Hazel Park. Is there anything that we should call out in the modeling as we think about the cadence of these four end markets ramping? Powersports is obviously, having a good year this year. Is ag maybe at 2025, 2026, or is there anything, with that cadence that we should be aware of?

Yeah. I wish I could predict the ag market downturn or the duration of the downturn, right? So, it’s -- we’ll just have to watch it really closely and then as we exit the year, right, we’ll have a better idea where interest rates stand and where yields and crop prices stand at the end of the year. But also, I want to remind everyone that ag is only 9% of our overall business, right? Yes, the headlines are very negative, but at the same time, right, it’s still a small portion of our overall business.

Okay. So, the ramping of these programs isn’t fully insulated from the overall market is the takeaway, whereas powersports, it clearly is.

Yep. Agreed.

Oh! Perfect. Awesome, guys. Well, yeah, congrats on the quarter. Thanks for the questions.

Thanks, Ross.

Thanks, Ross.

Thank you. There are currently no other questions at this time. I will pass it back over to the management team for closing remarks.

Once again, thank you for joining our call. We appreciate your continued support of MEC and we look forward to updating you on our progress next quarter. Should you have any questions, please contact Noel Ryan or Stefan Neely at Vallum, our Investors Relations Council. This concludes our call today. You may now disconnect.

This concludes the conference call. Thank you for your participation. You may now disconnect your line.