Hello, everyone, and thank you for joining the Mayville Engineering Company First Quarter 2025 Earnings Conference Call. My name is Sami, and I’ll be coordinating your call today. [Operator Instructions] I will now hand over to your host, Stefan Neely with Vallum Advisors to begin. Stefan, please go ahead.

Thank you, operator. On behalf of our entire team, I’d like to welcome you to our first quarter 2025 results conference call. Leading the call today is MEC’s President and CEO, Jag Reddy; and Rachele Lehr, 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 uncertainties, 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. Reconciliation 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. Our first quarter results reflected the team's strong execution and operational discipline. This allowed us to deliver 12% sequential sales growth, margin expansion and positive free cash flow, despite softer customer demand, amid continued inventory destocking. Our team's commitment to the MBX framework culture of continuous improvement and cost discipline contributed 140 basis points in sequential adjusted EBITDA margin improvement. These efforts to create a leaner cost structure allow us to operate more efficiently in this dynamic demand environment and create a platform to respond better when customer demand returns. Rachele will discuss the outlook in more detail shortly, but I would like to mention that we are maintaining our full year guidance. Our outlook is driven by strong year-to-date execution and stronger than expected demand within our less cyclical military and other end markets. That said, we are closely monitoring the evolving regulatory and macroeconomic environment which could impact demand in the second half of the year. At MEC, we are proud to be the largest domestic metal fabricator with approximately 95% of our sales and 92% of our sourcing coming from within the United States. As we await more clarity on the long-term direction of US Trade Policy, our business is well positioned to remain highly competitive as policy shifts occur and should be relatively insulated from the direct impact of tariffs. Our domestic footprint also enables us to benefit from OEM re-shoring activity, a trend that is being accelerated by the ongoing changes in US Trade Policy. We have recently been engaged with numerous new and existing customers who are exploring options to reposition their supply chain. Given the dynamic nature of our current trade policy, we expect that this trend will take time to develop. Turning now to a…

Thank you, Jag, and good morning everyone. Total sales for the first quarter decreased 15.9% year-over-year to $135.6 million. This decrease was due to softer customer demand across the majority of the company's key end markets and customer channel inventory destocking. This is partially offset by volume from new projects in our other end market and increased aftermarket demand in our military end market. Our manufacturing margin was $15.3 million in the first quarter, as compared to $20.9 million in the same prior year period. The decrease was primarily driven by the corresponding decrease in net sales. Our manufacturing margin rate was 11.3% for the first quarter of 2025 compared to 13% for the prior year period. The decrease in our manufacturing margin rate was attributable to lower fixed cost absorption from lower customer sales, partially offset by cost reduction actions. Other, selling, general and administrative expenses were $8.7 million for the first quarter of 2025 or 6.4% of net sales as compared to $7.8 million for the same prior year period or 4.8% of net sales. The increase in these expenses during the first quarter primarily reflects normal wage inflation and higher costs related to compliance requirements, market analysis studies and other consulting expenses. These costs will ease as the year progresses and, as customer demand returns, we expect that our SG&A will revert to our long-term targeted range of between 4.5% to 5.5% of sales. Interest expense was $1.6 million for the first quarter of 2025 as compared to $3.4 million in the prior year period due to a reduction in borrowings and lower interest rates relative to the first quarter of last year. Adjusted EBITDA for the first quarter was $12.2 million versus $18.5 million for the same prior year period. Adjusted EBITDA margin percent decreased by…

Thank you very much. [Operator Instructions] Our first question comes from Ross Sparenblek from William Blair. Your line is open. Please go ahead.

Hey, good morning, guys.

Good morning, Ross.

Hey, just to kick it off here, as we think about kind of the cadence of the end markets for the second half, can you maybe just kind of walk us through anything that stands out? It looks like maybe commercial vehicles have a slight ramp in the second half, whereas powersports, ag may be more steady on the top line.

Yeah, that is correct, Ross. Our current guidance, as we indicated earlier in March when we released our guidance, includes a slight uptick in the CV market in the second half. That is related to potential 2027 regulation changes and pre-buys in both 2025 and 2026. We also said in March that our first half is going to be approximately equal to the second half of last year 2024, and that we expect a modest increase with potential pre-buys and also potential interest rate changes in the second half of 2025. As it relates to powersports, right, that market continues to be highly interest rate dependent and we don't expect any significant changes in demand forecast in powersports and similarly, in agriculture, we do not expect any recovery in 2025 and expect the recovery to take some shape in 2026.

Okay, maybe just touching on tariffs and potential for reshoring, are you seeing opportunities and, if so, if there are any markets that stand out?

We continue to have good discussions with both existing customers and new customers, as it relates to tariffs. We have provided a number of customers with quotes and pricing on potential opportunities. Given the dynamic nature of current tariff discussions and our customers are being very conservative and they are not in a position yet to make significant decisions because if the tariffs sort of magically go away in three months, right, they don't want to be stuck with a different price structure in their supply chain. So I think just like all of us, our customers are also watching day to day the developments and if there is a significant tariff impact, I think MEC is well positioned to capture those opportunities. As we mentioned in our prepared remarks, we're 100% domestic manufacturer, 92% plus of our inputs are US sourced. If you include some of the Canadian purchases of aluminum that we get, which we're actively sourcing back to the US, it's almost 95% to 96% of our inputs are domestically sourced. Given that and our locations that are really favorable to our customers operations, we're really well-positioned to take advantage of any increased tariff regime we might see in the long run.

Okay, so if we were just assuming that tariffs are structural, what is like the average onboarding timeline for a customer, or if it would be 2025, 2026?

I think by, let's say by middle of the year, we see some really structural tariff regimes in place, we could start up a program as quickly as three to four months and depending on the size of the program, it could even be shorter than that. So there is a potential -- if we see a static tariff regime by middle of the year, there is a potential for us certainly late Q3, early Q4, for us to see some incremental benefit and tailwind to MEC.

Okay, thank you for that. I'll jump back in queue.

All right, thanks, Ross.

Our next question comes from Ted Jackson from Northland Capital Markets. Your line is open. Please go ahead.

Thanks. First of all, congratulations on just being able to control the things that you can control, it's impressive.

Thanks, Ted. Good morning.

Good morning. Sorry, I'm in an airport, so it's a little noisy right here. When you went through the outlook for your different segments, I didn't catch quite everything. What did you say for agriculture and what did you say for powersports?

Yeah, agriculture, we expect ag market, at least our revenues to be down mid-20s. And powersports, we expect to be down somewhere between low-single digits -- sorry, mid-single digits to mid teens.

Okay. The guide surprised me. I mean the color coming out of anyone who has any exposure within the commercial vehicle marketplaces, I mean, it's just, honestly, it's terrible. And I think that the tenor is that it's perhaps going to get worse before it gets better. And the ability for you to offset with things like military and other is impressive. So with that in mind, could you maybe provide a little more color about what's driving the improved outlook for both of those segments?

Yeah. So let me address CV market first, Ted. As we mentioned in our prepared remarks, we are qualifying our guidance maintenance on two factors, given that CV is almost 40% of our revenues. First one is recession. We're not building in any recession in the second half into our guidance. In fact, as we said, we're expecting a slight pickup in the second half revenues; that's number one. Number two is we're not building in any potential impact of potential cancellation of EPA regulation changes. So let me get into that a little bit more. The current guidance incorporates some level of pre buys in second half of this year and also going into 2026. If for any reason EPA decides to change the new regulations that are set to come in, in 2027, there are two effects to that regulation change. The first one is called -- what's called the GHG changes level three -- GHG3 changes. That really doesn't impact any of our commercial vehicle customer volumes. That regulation only requires that industry -- sorry, that GHG3 regulations, phase three regulations imply that the industry has to produce more electrical vehicles. So if that gets canceled, we don't expect our customers to see any significant volume impact that means we won't see any significant volume impact. The second part of the 2027 regulation changes is what's called as NOx changes. Today, the current engines are allowed to produce up to 200 milligrams of NOx emissions, whereas the 2027 regulations require the engine makers and the CV OEMs to get down to about 35 milligrams of NOx emissions. That is currently set in law. So let me repeat that, that is currently set in law to go into effect in 2027. That is a significant lift for the administration to change that; it has to go and change the law and then suspend the 2027 regulation changes. If that happens, that is a material event for the industry. So I want to caution that it's a heavy lift to change that, but if it does happen, then it's a material change to the industry that will affect the pre-buys in 2025, that will affect the pre-buys in 2026. But if you take a long arc of a three year period, the volumes are just going to normalize. The volumes are not going to disappear, it's just they're going to normalize versus this peaks and valleys we normally see in the CV market. So that is really where we are. As we sit here, we're maintaining our guidance with those two caveats of no recession in the second half and no 2027 NOx changes from EPA. If we find that these changes are going to happen in the coming months, we're happy to revisit our guidance and we're happy to inform all of you what the impact might be on our 2025 and 2026 revenues.

And I would just add, this goes back to your opening statement, Ted, control what we can control. And so that's where we have developed our playbook of the different scenarios and so should any of these events take place, we have the playbook lined out so we can execute swiftly and control our margins, manage our margins.

And I was remiss in welcome -- in not welcoming you to the quarterly calls. I look forward to working with you, Rachele.

Thank you, Ted.

Our next question comes from Andrew Kaplowitz from Citigroup. Your line is open. Please go ahead.

Hi, good morning. This is Natalia Bak on behalf of Andy Kaplowitz.

Good morning, Natalia.

Good morning, Natalia.

So I guess first question that I want to ask is like based on your team's -- based on your commercial team's engagement, how would you characterize the tone of customer conversations today versus 3 to 6 months ago? Are customers in a more reactive wait and see mode or are they still proactively exploring new projects?

I would say that the customers in certain end markets like ag and powersports, they are continuing to focus on destocking and continue to alter their production volumes to make sure that the channel inventories get cleared out. So, in those end markets, the conversations have been slightly muted, even though in our prepared remarks we talked about winning new business in construction, winning new business in powersports, et cetera. So we are actively engaged with every one of our customers, but we also recognize that our OEMs have their own challenges that they're trying to deal with and we're standing by them to support their activities, whether it's new product introductions, whether it is channel inventory reductions or preparing for 2027 launches. As we said also in our remarks, we're on track to win approximately $100 million of new business. In fact, as I sit here, end of April, we're ahead of our schedule in terms of winning new business even in this environment. But mind you that a lot of those programs we're winning right now are either 2026 starts or even 2027 starts, right. So we're always focused on long-term business development and long-term growth for the company, while as Rachele mentioned, trying to control what we can control in the short term. When it comes to commercial vehicle customers, we all follow ACT forecasts. ACT forecasts have been more conservative than what our OEMs have indicated, both publicly and what we see in our forecast from them, right. So we're taking a cautious approach to the CV end market because we know that there are some unanswered questions, particularly around EPA regulations that we just talked about. So with all of that, we're continuing to work with our customers, continuing to look for opportunities to support them and we're engaged with a couple of powersports customers where they're evaluating how much of their Asia-made components they want to bring back to the US. Our teams have been extremely busy in answering inquiries around re-shoring and on shoring opportunities. So it's an exciting time for us because, yes, there seem to be some dark clouds on the horizon, but our team is highly engaged with our customers. We're trying to control our cost structure and we're cautiously optimistic about some sort of settlement towards this tariff regime, whether it's structural or not. We'll have some clarity in the coming months and we're still planning on our second half being slightly positive compared to our first half.

Got it. That's helpful. And then just two follow up questions to that, I guess. First question as a follow up, could you help us better understand your revenue mix in terms of long-term reoccurring programs for short cycle or project race work? Has that mix shifted over time and does it influence your visibility into the second half of this year and fast forward 2026?

So generally speaking depending on the size of the program, it might take us three months to start up a small program to 18 months to start up a really large program. So given the mix of new business we're winning, a significant portion of the new business we're winning right now is perhaps 2026 or 2027 startups. And the rule of thumb is if we don't have that business in our bag by middle of the year, that's generally 2026 startup. Having said that, the tariff regime has opened up some opportunities for us, we're actively working them as we speak. That could be potential second half startups. We're encouraged to buy some of those activities and as they materialize more, we'll be happy to share more about them. And by the way, some of those opportunities, as I said, are in powersports, some of them are in electrical infrastructure, some of them are related to data centers. So some of these non-legacy end markets as well are coming to fore where we're really excited to support these new customers.

And those new opportunities are the place where we're able to put in our strategic value-based pricing model. And so as we look to the long term, in 2026, 2027, you'll see more of that in place as you look to our margins versus what you're seeing now because probably now only 5% to 10% of our programs are under that and we'll have far more in 2026 and 2027.

Okay, got it. That's really helpful. And then last question for me. Just focusing on the agricultural end market, ag came down mid-20s this year that you are forecasting. How should we think about timing for recovery? Are you modeling 2026 as a bounce back here or expecting more of a gradual return?

It still continues to be a dynamic environment. Current tariff regime doesn't really help. As farmers are looking at potential recovery in crop prices and exports, current high tariffs from countries like China do not really help US farmers. Having said all of that, the latest Purdue University ag survey, for the first time in a long time, indicated a positive uptick in farmer sentiment. That is something that really for us to watch as we go through 2025. Our initial assumption is that 2026 will be a gradual recovery for ag, but given the changes in global trade policy and potentially some increased farmer sentiment, it is possible that we could see a bounce back, but that's not something that we are planning at this point, but we're closely watching it.

Okay, got it. That's super helpful. Thank you.

Thank you.

[Operator Instructions] Our next question comes from Ross Sparenblek from William Blair. Your line is open. Please go ahead.

Hey guys, just a couple more here, if you don't mind. Taking on the new business opportunities and 100 million target, can you just update us on the progress here today and what the mix has been between new and existing customers?

I think we're on by end of April, Ross, we're somewhere between 35 million and 40 million of new business booked. That's a little bit ahead to do the linear math, right, it's a little bit ahead timeline wise to our $100 million target. Our sales teams are really active with existing customers. That is our first focus. And we continue to see a good set of wins in the CV market and also powersports and we mentioned as well construction and access market. So I would say that in all of these end markets, we're making good progress. What I call farming versus hunting. Our team is excellent in farming, we're from the Midwest, we know how to do that really well. But at the same time, we have had a significant focus since last year to look at new opportunities and new customers and new end markets. So we continue to engage with new customers in data center and electrical infrastructure and other end markets that are seeing secular growth. So those are the end markets we're excited about. We're having good conversations with them. I would say the 35 to 40 million I just mentioned to you, a significant portion of that is existing customers with a sprinkling of new customers. But our pipeline is really strong and I'm fully confident that our teams will hit the $100 million new business target this year. And I do expect as we go into the second half that we will see some new customers added to our list.

Yeah, no, that's great to hear. Maybe just kind of conceptualizing this growing program funnel, do you think that there could be some momentum here? I mean, is there a chance we could exit here at 120, 160, or was this more of a seasonality to the start of the year?

It's hard to tell. Look, as you mentioned earlier, right, if the tariffs are going to be structural, Right, that's a huge advantage for MEC. So we will wait and see. Of course, right, like many of us, we want more US manufacturing, we want certain level of competitiveness for US companies. So given all of that, I'm optimistic that with even some small structural changes, we will be able to gain ground and gain more business in the second half.

Okay. Well, yeah, just understanding the potential for kind of a lower for longer scenario here in some of the core markets. I mean, it'd be great to gauge your confidence level today around maybe achieving just the lower end of the 2026 revenue targets. Spending the time contribution of new business opportunities versus what would be required for a macro recovery.

That's a great question. As we talked about in our last earnings call, our view has not changed about 2026. We still see a line of sight to low end of our 2026 range -- revenue range at the same time, right, unless the bottom falls off and there's a huge recession and a significant change to EPA regulation. Those are so the two caveats I'll continue to mention. If we don't see those two things, then yeah, we still see a line of sight to low end of the range in 2026.

Okay. But even with the push out of the regulations, I mean, that's maybe 50 million in business, so 700 is still kind of a win in this environment.

Yeah, I would agree with you. At the same time, right, we also -- no one has asked us, I'll just volunteer, right. We continue to look for M&A opportunities, we continue to be active and, given our balance sheet and given our free cash flow generation capabilities and we'll see how the rest of the year materializes. There's a good possibility that we could enter some end markets that could provide additional growth for us through M&A as well.

Yeah, that's actually a great segue here. Just thinking about kind of the pipeline for M&A, how are you guys prioritizing end market diversification versus maybe geographic reach or additional manufacturing capabilities? Is there a top target for you right now?

Yeah, great question. I think the first and foremost, for us, priority is diversification, particularly given many of our end markets sort of went into the same down cycle this year that really opened our eyes to the need for further diversification of our end markets. So that's probably our number one -- not probably, that is our number one priority is diversification. Number two priority for us is accretive margin profile. And then I would say the third priority is being close to our customers with perhaps a different geographic exposure within the US. We're not going outside the US. We're still a U.S. based company, a US-based manufacturing company. So, perhaps southern states, all of that, as we mentioned in our M&A strategy slide that's on our website, that is still our focus and we have enough number of targets in our pipeline that match those criteria and we're really excited about what we can do here in the coming year.

That's great to hear. Thanks again guys. Congrats.

Thanks, Ross.

Thank you.

We currently have no further questions, so I'd like to hand back to Jag Reddy, some 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.

Thank you very much for joining. You may now disconnect your lines.