Good morning. And a warm welcome to the Mayville Engineering Company First Quarter 2023 Earnings Call. My name is Candid, and I will be your coordinator for today’s call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to hand the conference call over to our host, Noel Ryan with Vallum. Please go ahead.

Thank you, Operator. On behalf of the entire team, I’d like to welcome you to our first quarter 2023 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 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. Reconciliations of these measures to the closest GAAP financial measure is included in our quarterly earnings release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. And with that, I would like to turn the call over to Jag.

Thank you, Noel, and welcome to those joining us on the call and webcast. Our first quarter results demonstrated continued progress on our commercial and operational priorities, actions that position us to drive incremental margin expansion and profitable growth over the long-term. We delivered solid organic sales growth in the first quarter, driven by continued momentum within our commercial vehicles, military and powersports markets together with year-over-year growth in manufacturing margin. Net sales increased by 4.7% on a year-over-year basis, driven by solid demand in our commercial vehicle, military and powersports markets. Last quarter, consistent with our commitment to business transparency, we began to report quarterly revenues for each of our end markets and have provided relevant historical market data this quarter. While demand conditions were stable in the first quarter, near-term supply chain disruptions and fixed cost under absorption at our new Hazel Park facility impacted adjusted EBITDA and adjusted EBITDA margin rate. Fixed cost of under absorption at Hazel Park alone impacted the first quarter by $1.8 million and 120 basis points. Excluding the impact of the Hazel Park ramp-up, our normalized adjusted EBITDA has increased by 10 basis points to 10.9%. Turning now to a review of market conditions across our five primary end markets. Let’s begin with our commercial vehicle market, which represents 4.5% of our trailing 12-month revenues. During the first quarter, commercial vehicle revenues increased 16% on a year-over-year basis driven by strong demand and elevated build rates. Customer demand requirements continue to indicate strong demand through the middle of the year, followed by a slowing in the second half of the year and into 2024 as the industry navigates regulatory changes, as well as a general slowing in economic activity. Currently, ACT Research forecast the Class 8 vehicle production to decline 1% year-over-year…

Thank you, Jag. I will begin my prepared remarks with an overview of our first quarter financial performance, followed by an update on our balance sheet and liquidity. Total sales for the first quarter increased 4.7% on a year-over-year basis to $142.6 million, driven by a combination of improved sales volumes and continued price discipline. Our manufacturing margin was $16.4 million in the first quarter, as compared to $14.9 million in the same prior year period. The increase was driven by improved demand, increased commercial pricing and better absorption of manufacturing overhead costs, offset by a $300,000 decline in scrap income. Our manufacturing margin rate was 11.5% for the first quarter of 2023, as compared to 10.9% for the prior year period. The increase of approximately 60 basis points was due to the reasons just discussed. Profit sharing bonus and deferred compensation expenses were $3 million for the first quarter of 2023, which was similar to the prior year. Other selling, general and administrative expenses were $7 million for the first quarter of 2023, as compared to $5.7 million for the same prior year period. The increase was attributable to increasing salaries, wages and benefits, recruiting fees and higher professional fees related to the company preparing to be Sarbanes-Oxley Act Section 404 compliant for 2024 as the emerging growth company status will no longer be available. Due to these reasons, we feel that SG&A expenses on a go-forward basis will be approximately 4.5% to 5.5% of sales. Interest expense was $1.7 million for the first quarter of 2023, as compared to $567,000 in the prior year period, primarily due to higher interest rates. We anticipate that at current interest rates, interest expense should remain relatively stable, depending on our debt balance. Adjusted EBITDA decreased to $13.8 million versus $14.8 million…

Thank you. [Operator Instructions] Our first question comes from the line of Mig Dobre of Baird. Your line is now open. Please go ahead.

Thank you. Good morning, everyone and really appreciate all the additional disclosures that you provided here in your slide deck. So thank you for that. I guess my first question is on the demand side. You highlighted the construction vertical has seen some contraction for you, and I guess, I understand the comment on residential. But what you guys are seeing is a little bit different than I think what some of the OEMs have reported in their case, we have seen production increase quite a bit and everyone is talking about very nice growth in the first half of 2023. So I am kind of curious as to why you are experiencing different trends in that vertical and are there any specific equipment categories that you are seeing pull back maybe more than others?

Good morning, Mig. Thanks for the call and the question. Particularly when we are referring to construction, right? We have seen the general commentary around residential and non-residential and infrastructure markets. But beyond that, approximately 50% of our revenues come from access, particular access product lines, right? As you are aware, that particular customer had some supply chain disruptions that they would convey to us in Q1 that resulted in lower pull-through to our plans.

And do you view this as temporary recovery down the line? It sounds temporary in the way you just described it.

We hope it is temporary. But at this point, given other macro conditions in other residential and non-residential construction, we are cautiously optimistic that it was just a pause in Q1 and then we are hopeful that the customer can pick up their pace in the remaining quarters of the year.

Maybe more broadly, when you sort of look at the production schedules that are being shared with you by customers and you look at where you are now versus three months ago? Have there been any material changes either up or down? I understand you are reiterating your outlook, but within that outlook, I am wondering if certain end markets are progressing differently than you expected three months ago?

Outside of what we have provided in our presentation deck, right, the post on our Investor website. We are not seeing anything significant to highlight or call out at this point. Most of our customers are publicly traded companies. They have indicated no reduction in their demand publicly and then that’s exactly what they have communicated to us.

The other comment I would make, may get at a high level, right? When you look at Q1 of this year, we had about a $10 million negative impact of material price pass-through, meaning steel prices came down versus Q1 of last year at this point. So when you factor that out, our topline sales show of 4.7% at the macro level, but really stripped that out, it’s closer to 12% growth year-over-year. So we have seen an uptake in demand across the board.

No. I appreciate that. And I guess, really, the nature of my question was maybe not with a negative tilt the way you kind of framed the, Jag, but more along the lines of we are seeing companies actually increased guidance, right? Like many of your customers are able to raise their revenue outlook for 2023. They have a lot of backlog and they are finally starting to convert to backlog. So at least to my thinking…

Yeah. Yeah. That’s…

… that would translate an incremental business for you?

That’s a fair question, Mig. As Todd indicated, right, we did see a pickup in our actual volumes in Q1. We did pick up share gains in powersports as we indicated. We continue to see good strength in large ag. Small ag, we were talking to our customer who is pretty heavy in small ag, they are constrained, what they indicated to us was really lack of inventory on their dealer lots, right? So they said, hey, if we have more small ad products on the lot, actually, they can increase their market share. So, generally speaking, you are correct that there are good positive signs so far. The reason for our cautiousness is really two-fold, right? No one can really predict what the second half is going to look like given the macro environment we are in. So that’s part of our caution. The second one is the drag on our P&L right now, as we indicated, with Hazel Park, right? So we are being cautious and hoping to overcome potential drag from Hazel Park throughout the rest of the year and cautiously optimistic about maybe a softer landing in the second half.

Okay. Understood. Then my final question is around margin. Your full year guide at the midpoint cost for EBITDA margin just shy of 12%, obviously, we are not there in Q1, less than 10%.

Yeah.

Can you talk us through how you think about the cadence here? What has to happen in the second quarter and maybe the second half to kind of get us to your guidance? Thank you.

Hey. I would say the biggest thing, Mig, is really the launch of Hazel Park, right? So as we talked earlier in the year, the first half, we had about 60-40 weighted, the dilutive impact that Hazel Park would have. I mean it’s a large facility. We are ramping up a number of projects there. Unfortunately, in the first quarter, we saw some pullback and delays from the customer on some of those things. So the cost were a little bit higher than we expected in Q1. We would expect kind of a similar run rate maybe into Q2. But really, as we get into the back half, starting to get that fixed absorption and that benefit of volume in that location will then pick up that cadence. I mean, the base business is improving. So if you look at Q1 of last year to Q1 of this year, even a margin percentage if you hit back to our Hazel Park, has improved significantly, right? So we are going to continue that progression. It’s really a matter of timing with Hazel Park launch.

Yeah. Just to add to that. Todd is absolutely right. If we think of base business outside of Hazel Park, on every single metric, whether it is revenue growth, whether it’s manufacturing margin growth, whether it’s EBITDA margin growth, right? The team has done a fantastic job of managing with our MBX, right, driving additional productivity through the company in our base business. So our drag is really around -- all around -- centered around Hazer Park and even with customer interruptions of our production schedules with their supply chain challenges, the team has been really driving additional productivity. So I am really pleased with how the base business is performing and the improvements we have made over the past year and we continue to focus on driving Hazel Park execution as we look to the rest of the year.

But to be clear, the swing in margin, which to me, that would imply margins in the back half to be essentially about 12% and that is entirely owe to Hazel Park first half versus back half margin swing?

Well, it’s two-fold, right? As Jag mentioned, there is an expectation that hopefully as the year progresses that the supply chain issues within our customer base will subside, which should give us some benefit and then it is the launch of Hazel Park. I mean that is a significant cost. I mean it had a $1.8 million negative impact in the quarter, right? And that’s just the cost side of it, right? You think about it any volume going through there is in getting the normalized 12% to 15% EBITDA, right? So there’s also the profit side of it until we get past that -- if that absorption benefit, it’s going to take some volume here for that really sort of turn on profit for us.

Yeah. In addition to Hazel Park, we have a couple of other large programs that are bringing online in the second half. We talked about our powersports customer program that’s going to start late Q3 only Q4. We also talked about a CV customer program that we are investing significant CapEx in our Atkins facility to bring on new diesel tanks for CV customer. So that program will kick in, in Q3 as well. These incremental volume increases, right, will help us leverage better our existing assets and absorption.

Okay. Thank you.

Thanks, Mig.

Thank you. Our next question comes from the line of Larry De Maria of William Blair. Your line is now open. Please go ahead.

Hi. Good morning, Larry.

Good morning. Hi, guys. Just sort of staying on the same line of question to some degree here. You maintained your guide with 66.5 adjusted EBITDA at the midpoint in the sale of zero to plus 8. We don’t see any of your markets going up in your charts now actually shifted a little bit. Small ag weak, you called out a weaker second half in truck and I guess the way we see this adjusted EBITDA needs to go up 15% on average the next three quarters at the midpoint. So can you kind of help us with a bridge to get these numbers, because what we are -- here, obviously, they seem aspirational, but obviously, you would have some underlying points to make and why you can hit at least, let’s say, the midpoint.

Yeah. We are happy to provide additional color on each of the markets, Larry. Commercial vehicles, right? ACT indicates that approximately the year is going to be flattish or negative 1% on the volume. As I just mentioned, we are gaining share in the CV market. Even though the market may be flat, we expect our sales to be up in 2023 with new programs coming online in the second half. Construction access, we did touch on that and construction access, we are going to be slightly down year-over-year. But in powersports, as an example, we are gaining significant share. We have got new programs that are coming in not only with existing customers, but also with new customers that are coming online in -- throughout the year. Current customers are continuing to ramp them up in Hazel Park. The new customers, as I just mentioned, coming online late Q3, early Q4, with the incremental business in powersports, we expect to be up in powersports, even though the market is going to be down. Ag, I believe I mentioned both strength in large ag, but also potential upside in the small ag in the coming months. Military has been a strong performer for us. So, given all of that, we feel pretty good about our demand growth and hitting our revenue numbers for the year.

And on the margin profile, I mean, we do not have to average 15% in the next three quarters to average out to the 12% at the midpoint, as you called it. We will see and do expect as Hazel Park again, continue to launch the things that Jag just mentioned related to the other facility launches. We do expect to see that margin dollar increase quarter-to-quarter, and so our expectation is, as you think of that midpoint, we reiterated or reaffirmed our guidance and we feel confident that we can still achieve it. Certainly, supply chain, as we -- you mentioned, Mig, and last question, supply chain normalization does have a significant impact on our business. And so the expectation is that we will improve in the back half. And again, that’s going to allow us to be much more efficient and that will save those dollars to our bottomline. So we still feel good on our guidance and really think as we look to the next few quarters as markets -- if they stay as we expect or improve and potentially, I think, just maybe upside to that.

Yeah. Thanks for that. And with 15% EBITDA growth in the next few quarters, not margin. But maybe put another way, can you give us a help on the split of first half or second half EBITDA?

So when you think of -- again, we don’t do quarterly guidance, so I don’t want to kind of go down that. But when you think of $67 million is like you indicated was the midpoint. I would say it’s maybe a 40-60 split, 45-55, thinking first half versus second half. Again, the impact of Hazel Park, the launches and the alleviation of supply chain issues at our customers are really the gating factors, right? Those are the wild cards. We feel confident in our execution, we are hoping that those things will continue to progress and we will see that nice margin pickup in the back half.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Tim Moore of EF Hutton. Your line is now open. Please go ahead.

Good morning, Tim.

Thanks…

And welcome to MEC.

Hi, Tim.

Oh! Thank you. Jag, I appreciate it. And it was nice to see the sequential expansion of your gross margin and your EBITDA margin and like it was said earlier, it was very helpful to get those year ago quarterly sales figures for your end markets. So thanks for sharing that. I just want to hone in on a point that you have alluded to and commented a bit on and we know that maybe you are being more conservative for commercial vehicles and maybe some of the end markets for the second half of the year. But can you kind of just maybe reiterate or elaborate what would be the main swing factor between the high end and the low end of your sales guidance range? Is it really whether or not the commercial vehicles slow down enough in the second half of the year or is it more so the ramp-up of the cadence at your Hazel Park facility possibly in the fourth quarter?

Yeah. Excuse me. Okay. Tim, I think, significant growth for us to hit the upper end of the range, we will have to come through two avenues. One, customers continuing to forecast better. Right now, the reason why our range is so wide is many of our customers continue to see significant downtime in their production lines because they can’t get parts. Last quarter, as an example, one of our CV customers had their large structural rail shortage, right, from Mexico. They shut down their production line for a number of days, right? But they are going to catch up. That’s not a lost sale, it’s just a delayed sale. We have similar situations across our customer base and that’s what we continue to struggle to forecast, and that, of course, results in under absorption within our plans. The second one is around our larger macroeconomic environment, will incentives in powersports markets increase the end user demand where our or customers can continue to pull more volumes through our factories or not, right? So those type of situations, right, will help us hit the higher end of the range if they swing to the positive. On the other side, if we continue to see higher interest rates and continued supply chain disruptions, we think we will be towards the lower end of the range. But net-net, sitting here, right, we feel pretty good that we can stay in the range and continue to drive additional growth through new program wins and Hazel Park ramp-up. Hazel Park ramp-up by itself. I don’t expect that to swing a significant amount of whether we are going to be in the range or out of the range, right? So, yeah, it will have some impact. To me, the focus on our hazard part is really around hitting our margin, numbers hitting our EBITDA targets versus can we stay within the range of the demand or rather revenues.

Great. Jag, that was very helpful color. My next question is a two- parter around your MBX initiative. You mentioned in the previous remarks that you rolled out the key performance indicators already. So the two-part question is, are you close to finishing the rollout of the Kaizens to all your plans? And have you visited each of the top customers to discuss your goal of commercial excellence and maybe some catch-up pricing lever, because it seems like maybe you might have been a little bit behind on pricing versus cost inflation. I am just wondering if that could be a driver over the next 12 months on the pricing side?

So the key performance indicators, not just -- okay, yes, every single plant has set of KPIs, right? It skewed it, is what we call it, safety, quality, delivery, productivity and inventory. So disputed measurements or KPIs have been rolled out late last year, December actually, to every single plant across the company and then we track the performance of every single plant every month in our business reviews, right? So that’s been rolled out. The second one is all of our key large sites, many of them, they all have similar Boards, KPI Board set up. They all had significant number of Kaizens that were performed or conducted in the last quarter and we have responsibility for each and every single plant already laid out in terms of MBX team, right? So, I haven’t done a Kaizens in one of our small plants, but I have done Kaizens in many of our major plants are in the process of finishing major President’s Kaizen in many of our key plans this year, right? So I feel pretty good about our rollout. As I mentioned when we rolled this out late last year that it will take a good 12 months to 18 months for a program like MBX to take root, right? So we are making really good progress. We just came back -- the leadership team just came back from a week long Kaizen in one of our facilities last week, had tremendous results. We will talk about those projects in the next quarter’s call. And as we indicated in our Q1 presentation, we highlighted some of the Kaizens that we conducted. I see great momentum. I see a lot of energy around it. First time for many of our employees, right, they are visiting other plants, right? Learning from each other and taking back some of the learnings back to their home plans to implement them. So it’s been a really great initiative for us and I am really positive, not just positive, I am energized by every time I go spend a week in a plant and continue to drive these improvements.

That’s helpful color. Thanks for sharing it. And my next question is really about filling in Hazel Park. What type of end market programs do you expect there, would it be more of the electric vehicle battery closures, do you think you can be doing some powersports, recreational stuff? And then I just had an overall question, if maybe -- if you haven’t yet -- if you would have an estimate of maybe what electrification could be as a percentage of your sales, maybe next year when you ramp-up Hazel Park more with possibly the EVs and if you take all electrification for everything, you are on recreational vehicles, even the ag program, is it could be close to 5% of your sales next year?

We are in the process of quantifying that. It’s a little bit challenging sometimes, Tim, because the same program, how do we count, right? We can count in CV market and then also in the EV market, et cetera. So we will continue to define how we keep track. I would say we are going to be right now under 5% of our content is going into better electric vehicle programs. Next year, perhaps, we will get to a 5%. But we did -- we do think that will get to upper single digits in the coming years, but we will have more on that topic during our Investor Day later this year. And then you did ask me another question Hazel Park. In terms of what sort of end markets programs are going into Hazel Park. Certainly, commercial vehicles; certainly, powersports; certainly agriculture. We don’t expect, at this point, either military or access type products to go into Hazel Park.

That’s helpful. I appreciate that. My last question is, how is the search going for making inroads into lightweight next-generation products and renewables, cleaner technology. It sounds like it will be more of an inorganic bolt-on acquisition strategy and can we expect maybe the time frame of that, something to be announced on that by the end of the year?

I mean, obviously, right? No one can predict when a certain company can go acquire another company. Sitting here, I won’t be able to predict that for you. But having said that, as we mentioned in our last call, right? We hired Sean Leuba, our General Counsel and Head of our Corporate Development. He was Head of Corporate Development for Caterpillar and it’s been keeping busy, right, building that pipeline and building a really good process for us to be able to execute when the right opportunity arises, right? So I am still bullish that this is the place for us to go invest and I continue to see customer demand coming through from many of our customers, both in ag and construction and commercial vehicles for lightweight frames and lightweight content. So we are pretty bullish on the future of that market and we continue to beef up our pipeline so that we can invest in that arena.

Great. Thanks a lot, Jag. I appreciate it. That’s it for my questions.

Thank you, Tim.

Thank you. As there are no additional questions waiting at this time. I will hand the conference back over to Jag Reddy with Mayville for closing remarks.

Once, again, thank you for joining our call. Should you have any questions, please contact Noel Ryan or Stefan… [Abruptly Ended]