Welcome, everyone, to the Mayville Engineering Company's Third Quarter Earnings Call. My name is Victoria, and I'll be conducting our call today. [Operator Instructions] I will now hand over to your host, Nathan Elwell, Investor Relations, to begin. Nathan, 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 and 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. More information regarding such risks and uncertainties, please see our filings with the SEC, including our filings on Form 10-K for the period ended December 31, 2020. 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 is Bob Kamphuis, Chairman, President and Chief Executive Officer; Todd Butz, CFO; and Ryan Raber, EVP of Strategy, Sales & 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. Sitting here today, MEC's headlines are continued strong medium and long term demand trends across the end markets we serve, plus increased interest in our services from a broadening range of companies. However, our company's supply chain constraints have resulted in near-term volume deferments. For the third quarter, we produced net sales of $109 million, approximately half of the $17.9 million improvement over last year was driven by material price pass-throughs to customers, with the remaining increase attributable to improved demand. We delivered EBITDA of $10 million, which rose 10 -- operating income of $864,000. Despite the macroeconomic challenges we are now facing in 2021, we have once again outperformed on almost every metric on a year-over-year basis. For example, manufacturing margins were $10.9 million, which increased $1.2 million over last year due to higher volume of production, higher scrap income, partially offset by inflationary pressures. Across the board, the demand trends continue to be very positive. However, our short term volumes were impacted this quarter as supply chain disruption became more of a problem for some of our customers. This is a temporary situation, and there are 2 pieces of good news for MEC. First, these volumes have only been deferred, and we expect to work through the situation with our customers as their supply chains adapt in the coming quarters. Second, MEC's owned supply chain is 99% concentrated in the U.S., and we have been able to maintain our supply of raw materials and components with only minor disruption, albeit at higher prices. That means we remain ready when our customers are able to ratchet up their volumes again. Our performance has been affected by the dramatic production changes in September at Class 8 truck OEMs, which led to rapid volume deferments…

Thanks, Bob. I'll begin with a look at our third quarter financial performance before providing commentary on our balance sheet, liquidity, thoughts on guidance. As we noted in our press release, we recorded third quarter net sales of $109 million as compared to $91.1 million for the same prior year period. The approximate 20% increase was primarily driven by contractual raw material price pass-throughs to customers in the current period and market demand increases following the pandemic that caused customer shutdowns during the prior year period. Manufacturing margins were $10.9 million for the third quarter of 2021, as compared $9.7 million for the same prior year period, an increase of approximately 12%. The increase was driven by higher production volumes and scrap income resulting from improved market pricing for scrap material in the current period. These improvements were slightly offset by inflationary pressures on wages, benefits, materials and general manufacturing supplies. The company also incurred approximately $800,000 in launch costs related to the new Hazel Park, Michigan facility during the third quarter. Overall, we expect to incur between $3.7 million to $4.3 million in launch costs this year. In addition, the prior year period included $687,000 of restructuring costs charged to cost of sales related to the Greenwood facility closure, which was completed in the third quarter of 2020. Manufacturing margin percentages were 10% for the third quarter of 2021 as compared to 10.7% for the same prior year period, a decrease of 70 basis points. The decline was due to the $8.4 million impact of material price pass-throughs that increased sales, but do not increase margins. $2.7 million associated with contractual material pricing lag, $800,000 of launch costs associated with the new Hazel Park, Michigan facility, and $400,000 of other inflationary cost pressures. When the impact of these are…

Thank you, Todd. I'm pleased today with where things stand at MEC with the macroeconomic headwinds limiting our potential growth, but we will likely continue to see that in the near term. I'm gratified with how our team is responding to these challenges. And with the demand trends we are seeing across our business today. We are maintaining and expanding the great relationships that we have with some of our best blue-chip companies in the world and have interesting opportunities on the horizon with new companies and new end markets. I'd like to thank our employee shareholders for their dedication, creativity and willingness to go the extra mile for our customers. I'm also excited about our build-out and expansion plans for our new Hazel Park facility in Michigan, which will be a big near-term focus for us and look forward to addressing the opportunities that 2022 has in store for MEC. With that, operator, we'd like to open the call for questions now. Thank you.

[Operator Instructions] Our first question comes from Mig Dobre from Baird & Co.

So looking to maybe clarify some of the assumptions around your guidance a bit. If I'm looking at the fourth quarter here, I'm sort of curious here, do you think that you're going to be able to increase production sequentially? Will your customers' deliveries, based on what you're hearing right now, be able to increase sequentially, because the range, right, is suggesting anywhere between sort of flattish sequentially to actually a little bit of growth, maybe even quite a bit of growth relative to 3Q sequentially?

Yes. I think, Mig, there's a couple of contributing things going on here in the fourth quarter. One will be with continued price increases based on material cost pass-throughs that are still occurring going into the fourth quarter, greater than they were in the third quarter. And secondly, some modest volume improvement, but also some pricing action to lift pricing in regard to some of the inflationary items that we've been experiencing.

So volumes, you're saying, are getting a little bit better sequentially. And based on what you know today, are there specific end markets that are starting to get a little bit better? Can you comment on that?

This is Ryan. Yes. In the third quarter, we experienced some more severe shutdown activity, particularly in the commercial vehicle space. And as they work through, I'll say, the supply chain challenges at their level, sequentially, we will see just more days of production in the schedule in the fourth quarter. For the most part, all of our end markets are very strong. If you think about power sports and construction and access, agriculture, we'll watch the labor issues at one particular customer to see what the overall impact is there. But for the most part, we would expect volumes to continue to build on into next year with really the caveat being, when can they -- meaning our customers -- continue to ramp their volumes to meet their demand as they work through the supply chain issues.

And I understand that visibility is perhaps low if we're thinking about 2022, but presumably, maybe a little bit better in terms of the fourth quarter itself. So you mentioned that pricing is once again going to accelerate, and that seems to be dilutive to margin. If I'm thinking about the manufacturing margin then sequentially in the fourth quarter, is there any reason to believe that the manufacturing margin can improve sequentially relative to the third? Because presumably, pricing remains as big a drag, if not bigger. And labor is still going to be a challenge that you're going to have to deal with, so how do you think about that?

This is Todd. So when you think of the fourth quarter of the manufacturing margins, as Bob mentioned, we will have material price pass-throughs that will continue to be a bit dilutive to the percentage, but there's also other pricing activities ongoing. And so that afford a lot of that impact. And so when we look at the fourth quarter, we do expect sequentially that we'll see a little bit of a step-up in the manufacturing margins. Now keep in mind, you have to exclude the impact of launch costs for the Hazel Park facility as those costs really begin to ramp-up in the fourth quarter.

I guess my final question then, with that perspective that you've provided, is it fair for us to think that really the bogey as far as guidance is concerned is really towards the low end of the range. Mostly it's because, look, your -- you've got one quarter left, and you put out a very wide range in terms of your EBITDA guidance. And at least to me, it seems like the low end is kind of what we should be thinking for the fourth quarter?

I think all things considered, Mig, that's a correct assumption.

Our next question comes from Vlad Bystricky from Citigroup.

So you talked about, obviously, labor availability, increased wage pressures and you mentioned the strike at a domestic manufacturer as a large customer of yours. So can you talk about how much of an impact those labor actions may have had on your demand outlook for this year? And then just more broadly, how you're thinking about the risk of incremental labor actions to impact either customer demand or your own abilities to produce?

We've included in our forecast, some moderation because of the event that's ongoing there. And I guess, your question was in regard to our customers' customer. I guess I can't really speak to that...

Well, just in regard to your broader customer base, whether you see any risk of incremental sort of labor disruptions at other customers or within your own operations?

Within our own operations, I think not at our other customers, I really can't speak to that. They're working closely with their people. Everybody is seeing some good things going on in the marketplace, and they'll deal with it accordingly as we have. So I think we're -- we, in our company, are in good shape there. Certainly, the limited availability of skilled workers, which were offsetting with more investments in technology, automation, those are things that are going to continue to improve our output.

And then just -- there's a number of moving pieces here, right, as we think about '22. I know you're not guiding to '22 yet, but given just the cost pressures we've seen, some timing lag between when pricing comes in, the facility ramp in Michigan that you're building out. I guess, can you give us some color on just how you're thinking about the potential for EBITDA margin expansion in '22? And then the longer term path back to 15% or to 15%?

Sure. Let me make a couple of general comments, and I'll ask Todd to maybe provide some further color. Obviously, higher volumes and better utilization always helps in your absorption. Typically, and we've had some choppiness here in the third quarter because of these shutdowns, et cetera, that aren't nice and smooth, so you have to work through that and you're not maybe as efficient with your people as you'd like to be. So I think those margins will improve because of more volume and less choppiness, even though we're anticipating that to continue for a bit here. Insofar as new revenues, that will depend on that customer's timing. And as that information becomes available, we'll certainly be talking about '22 at the right time with you.

And Vlad, this is Todd. The other comment I would add is when you look at the third quarter results and just around 9% adjusted EBITDA, when you really look at the components of it, you factor all -- as you say, the launch cost, the material pass-through impact, the material lag component on pricing and then these other inflationary costs, which we have mechanisms in place to recover here in the coming quarters. And when those markets begin to stabilize, our third quarter, in a general sense, a little been near 14% adjusted EBITDA already. And so when you think about volume increases and getting back to pre-pandemic levels, you can easily make that assumption that we're going to have a good increase in it from 14% to 15% when you think of leveraging that fixed overhead. So really, as we stand today, we feel very confident. And things we've put in place, when you think of, as Bob spoke to, new technologies and automation, the plant consolidations over the last 18 months, the launch of the Hazel Park facility and then our pricing strategy. So I think we're really aligned around that 15%. We just need to get back to that pre-pandemic type volume.

And we will now pass over to Larry De Maria from William Blair.

So just following on the last line there, we've been talking about hitting $90 million in EBITDA next year for quite a while. And now it sounds like we're talking about new customer coming on early in '22, now we're talking first half '22. So I'm just curious, are we thinking this is slipping now? Do we still think $90 million is achievable next year? And do we still expect $15 million of EBIT from the new customer or is it more than that because we've more or less doubled the size facility? So can you just kind of update us on all those factors should we thinking about.

I think, Larry, generally, we haven't talked about 2022 guidance. However, in a big sense or a big picture I know many of the analysts have put a number to it. I think that number is something that we'd have to continue to look at and study before we come back and make comments on it. We are progressing our margins, our absorption and our volumes are getting better all the time. So we are definitely on that map to the 15%. And it will be a matter of timing. We said that we expect some headwinds even in the future, I don't know how big they'll be but I know there's work to be done at our customers to get beyond that and get more stable. So I have to be a little careful on putting out expectations at this point. The -- time will give us better information.

Is the EBIT number that you've guys have formally talked about contribution next year for the new customer, is that still in play? And is it $15 million or is it more than that now with the larger?

No, I think that's generally in the ballpark.

Okay. And then obviously, the Deere strike, it is what it is. Are we seeing any changing in the market for orders or are we still getting orders and delivering product to them? Because what I'm curious about is the ability to slow down and then ramp up when this presumably gets resolved. And just curious about the -- some of the timing, and do you expect some moderation in the fourth quarter, but are we seeing it yet or is it more -- what we're just expecting to have?

We've seen a little moderation, but they are continuing to produce. As they've said, we're continuing to ship product as they expect us to. And I guess, what the future holds, we'll be up to know. But we've moderated a little bit, I guess, to give you a little more flavor there.

Yes, that's exactly I was wondering. Last quick question. On the M&A pipeline, you did mention geography, are we thinking close to home like Mexico? Or when it comes to geography a little bit further from home, if you could just clarify and...

No, it would be in North America, certainly.

[Operator Instructions] We have no further questions. I will now pass over to Bob for final remarks.

Okay. Thank you. Well, thank you for your time today, everybody, who is on the line and your continued interest in MEC. We look forward to talking with some of you at the Baird Industrial Conference next week, and we appreciate all your questions and follow-up. Thank you very much.

Thank you, everybody, for joining today's call. You may now disconnect your lines.