Hello, everyone, and welcome to the Mayville Engineering Fourth Quarter and Full Year 2023 Result Conference Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions]. I will now hand over to your host Stefan Neely at 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 fourth quarter and full year 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. 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 welcome to those joining us on the call and webcast. 2023 was a year of significant progress for the entire MEC organization as we continue to advance a multi-year business transformation journey. Our entire team came together under a One MEC One mission mindset that emphasizes performance excellence and a collaborative customer-first approach. Last year, we sharpened our commercial focus expanding within higher value market adjacencies while improving our operational discipline leveraging automation and process efficiencies. We introduced a balanced capital allocation strategy investing in innovation and robotics, prioritizing high return capital-light advancements with payback periods of less than 18 months and inorganic growth while returning capital to shareholders through $2 million worth of opportunistic open market share repurchases. Our fourth quarter performance was a solid finish to the year, one highlighted by continued organic revenue growth, substantial year-over-year margin expansion, improved profitability and the second consecutive quarter of record free cash flow generation. During the fourth quarter, demand conditions were generally favorable primarily driven by new project launches in our powersports, commercial vehicle and other end markets. Continued strength in our military end market coupled with tailwinds from public infrastructure-driven demand in our construction and access market. Importantly, our operational and commercial self-help initiatives are continuing to deliver improved profitability and cash generation to improve the cost absorption, value-based pricing and enhanced working capital efficiency. As expected and as previously communicated, our fourth quarter results were impacted by the UAW strikes that were resolved in November together with the ongoing ramp up of production at our Hazel Park facility. In combination, these factors impacted fourth quarter adjusted EBITDA by 2.9 million. During the fourth quarter, we generated a second consecutive quarterly record 19.9 million of free cash flow. Consistent with our capital allocation priorities, we…

Thank you, Jag. I'll begin my prepared remarks with an overview of our fourth quarter and full year financial performance followed by an update on our balance sheet and liquidity that will conclude with a review of our 2024 financial guidance. Total sales for the fourth quarter increased 15.6% on a year-over-year basis to $148.6 million driven by a combination of the MSA acquisition and improved organic sales volumes partially offset by the $5 million impact from the UAW strikes, which was primarily in our CV market as well as softening demand in our agricultural end market. When excluding the MSA acquisition organic net sales growth was 6.1% on a year-over-year basis. Our manufacturing margin was $18.2 million in the fourth quarter as compared to $13 million in the same prior year period. The increase is primarily driven by increased organic volumes, MBX initiatives, and the acquisition of MSA. These tailwinds were partially offset by the impact of unobserved fixed costs associated with the new project launches, operational restructuring expense, and the impact of the UAW strikes. Our manufacturing margin rate was 12.3% for the fourth quarter of 2023 as compared to 10.1% for the prior year period for an increase of 220 basis points. Profit sharing bonus and deferred compensation expenses decreased by $500,000 to $3.6 million for the fourth quarter of 2023 which is driven by stock forfeitures related to restructuring of our operations team. Other selling, general and administrative expenses were $7.2 million for the fourth quarter of 2023 as compared to $6 million for the same prior year period. The increase was primarily driven by an additional $1.1 million of legal expenses relating to our former fitness customer. Interest expense was $3.6 million for a fourth quarter of 2023 as compared to $1.2 million in the…

[Operator Instructions]. And our first question goes to Mig Dobre of Mayville Engineering [ph]. Mig, please go ahead. Your line is open.

Hi, guys. This is Peter Kalemkerian [ph] on for Mig this morning. Thanks for taking my question. First, you mentioned 5 million negative impact to sales and commercial vehicles in the fourth quarter. Will there be catch-up on this in the first quarter? Is that embedded in full year guidance at all? Any color around that?

Hey, good morning, Peter. Yes. Generally, I would have said with order books pretty full and significant backlogs for most of OEMs in the CD market, that 5 million missed would carry forward into 2024. Having said that, that same customer continues to have, as they have publicly indicated, some supply chain challenges as well in Q1. So, given that, it's possible that could just move into 2024. But also, there's a general slowdown expected in 2024 for CD industry as a whole, as we mentioned. So, it remains to be seen. Our forecast includes that potential carryover into 2024 in that market.

Great. Thanks for the color there. This one might be a little more specific, but in your end market outlook, just looking at the slides, you now have the ag industry outlook down. It was revised from flat to down, I believe. But the company outlook for MEC to be flat was unchanged. I understand the share gain commentary, but with all the OEMs now talking about sizable declines in large ag, production cut, probably going to end somewhere in the magnitude of 10%, 15%. What gives you confidence in your outlook for ag on the MEC side being flat year over year? And if it's all share gains, is there a way to add some color or even quantify what you're looking at there?

Yeah, that's a good question. You're absolutely correct. Most of our ag customers have indicated a decline in the range of 10% to 15%, both in large ag and small ag as well. As you recall, MSA that we acquired mid-year last year also had some exposure to ag. I would say the incremental ag revenues from MSA, they'll lap right in 2024, is approximately $4 million. So that's one plus. Significant share gains, as we talked about, and significant new project launches that we have mentioned in this call and previously right will continue to help us maintain a flattish growth in that end market. As you guys have seen from recent ag shows, some of our customers are highlighting some new technologies and new platform launches. We are on multiple of those programs. So that gives us confidence that as the market is slowing down, but with new project launches and new product launches from our ag customers, we continue to benefit from that growth as well.

All right. Great to hear. One quick last one for me, actually. Any update on the lawsuit, the fitness customer lawsuit? Any changes to the timeline there?

Yeah. Look, the lawsuit, I guess the wheels of justice turned slow. All kidding aside, the parties have cross-appealed the court's order on the motion to dismiss. Peloton appealed the portion of the order that denied the motion to dismiss the claim for breach and anticipatory repudiation of contract, and MEC appealed the portion of the order that dismissed the claim for breach of the duty of good faith and fair dealing. Both appeals are pending. Additionally, Peloton filed a counterclaim alleging that Peloton was induced by fraud to enter into supply agreement and seeking the session of supply agreement and damages, among other forms of relief. So we have answered Peloton's counterclaim as well, denying the allegations. So as we continue to pursue this claim, we continue to remain confident in the protections within our agreement. So that's a long way of saying the lawsuit continues, and we're confident in eventual outcome in the legal system.

And Peter, this is one comment I would make. One comment I would make is in our guidance, we have reflected about a $1.5 million to $2 million of legal costs as this case continues to develop. So just know that when we provided guidance, we've contemplated all those scenarios and included that already in our 24-hour work.

Great. Thanks for all that, guys. A lot to touch just there. I will jump back into the queue. Thank you.

Thank you. The next question goes to Tim Moore of EF Hutton. Tim, please go ahead. Your line is open.

Thanks. And nice EBITDA guidance for this year and free cash flow generation was quite impressive in the fourth quarter. As you embark on that 200 million cumulative free cash flow through 2026 goal, it was also nice to see the auto worker strike wasn't as bad as originally expected. And I just want to kind of reconcile one thing, Todd and Jag. For your sales guidance for this year, thanks for giving that organic growth guidance. That includes the 20 million to 30 million incremental sales until your anniversary on July 1st for the MSA acquisition. It seemed about 10 million-like compared to what maybe I was forecasting, but your EBITDA of 46 million was exactly what I had in my model. So how confident are you in that 20% EBITDA margin, incremental? And I'm just wondering, is there any end markets that might be lighter in the first half of the year for MSA, which doesn't really have commercial vehicles, but you've got the, I don't know, 19% ag sales exposure it had, but RVs bottomed out. So I guess what I'm kind of getting at is what's maybe the end market delta on sales for MSA in the first half of this year, and what gives you confidence on 20% EBITDA margin?

Morning, Tim. Look, I don't think that there's any particular end market that's got a delta that we're forecasting against what we have indicated in the past. Todd, anything you want to add?

Yeah. Morning, Tim. What I would say is within our guidance, certainly we've contemplated numerous scenarios and we've risk adjusted. When you think of the first quarter sequentially coming out of Q4, we would expect to see a rise in volumes and sales about, you know, between 2% and 4%. Second quarter, again, similar growth, but knowing that there's going to be, you know, a decline in the CV market that begins in the second half. Now, we're highly confident we're going to be able to buffer that through our new launches and other activities, but certainly we'll see a little bit of maybe top line deterioration just because of that offset, right? And, you know, fourth quarter certainly would, you know, to shorten, let's call it working days and expected shutdowns. So when you think of all these market dynamics happening, the CV is primarily the largest change and that really begins in the second half. You know, ag, we've contemplated, you know, powersports, again, we're indicating that it's up year over year despite, you know, the macro environment showing it down. You know, margin progression, again, we expect to continue to see that as Hazel Park, you know, comes online in a more significant way in the second half. So, you know, as Jag mentioned on the call, our degree of confidence in this forecast is very high. And we did look at it, you know, all end markets and really put a lot of thought into, you know, if things, you know, were to deteriorate slightly from where they are today, we're at the low end of that guidance. Certainly if things improve, we're at the higher end. So I think we've encapsulated everything that we think can happen this year. And I would hope that this does reflect, when you look at our markets, our resilience. When you think of our historical ability to kind of offset declining markets, and this is another demonstration of that, that despite our markets and some of them being down double digit, you know, we're expecting flat type of, you know, sales growth. That's because of our ability to reposition and gain market share during these times. And when you think of the progression to 25 and 26, you get that multiplier impact. You know, these markets are expected to rebound. And with that, we're going to get the top line sales, utilization, and the nice margin progressions as we move forward.

Let me hit on, Tim, you know, the points that Todd made, while, when I was joining the company in 2022, you know, I've talked to a lot of customers, a lot of shareholders, and obviously investment community, right? One of the big concerns that was raised was that MEC tends to, many of the end markets that MEC plays in, right, you know, whether it's ag or commercial vehicle or, you know, construction, right, they tend to move in the same direction given the macro exposure, right? And that could be, you know, a challenge, you know, in a down year, right? So what we're saying here, as we have laid out clearly end market by end market, when CV is going to be down 16%, we're going to be flat. When ag is going to be down, you know, 10% to 15%, we're going to be flat, right? When powersports is going to be down, right, you know, let's say mid-single digits, we're going to be up, right? That demonstrates the significant work the MEC team has put in place for the last number of years to continue to grow our business, continue to gain share, and continue to offset, right, potential downturns with new program launches. And, of course, right, bringing on incremental capacity, not only to his report, but also through our MBX initiatives, we have unlocked significant open capacity in previous years where, you know, the sales team might have said, hey, we don't have capacity to bring on new business. Now we have completely opened that up, right? We have significant capacity we can bring on so we can confidently continue to sell, right, even though, right, the market may be up. So what that's helping us in a down year is that we have significant backlog that we're going to be able to deliver in 2024. And then when the markets come back up in 2025 and 2026, that's going to be a significant tailwind for us, right? So that's why we feel really confident about our end market exposure, but more importantly, how we have been able to offset, you know, any potential declines in a year where, you know, multiple end markets are going to be going, you know, in a downward direction.

That's helpful. And you made a really good point, Jag, on how construction could move with CVs, because, you know, I was more obsessed with the MSA side and, you know, given that they have RVs at bottom, that shouldn't be a headwind for you this year. And, you know, they don't have any really CV exposure much now, but, you know, they have the construction access and agriculture. That's helpful. And it was really nice to hear about the open – yeah, the open capacity point's a really good point. I know we talked about it going to lunch a year ago. So I just got two more quick questions. They're pretty easy, maybe for Todd. Todd mentioned Hazel Park, you know, maybe break even this year. Todd, how are you thinking about how much, you know, under-absorbed costs do you think in the first nine months? Let's say you get to that 25 million quarterly run rate fourth quarter. You know, you're looking like 3 million drag through the nine months, including launch and onboarding, new customer costs?

Yeah, good question, Tim. So really, it's going to be more front-end loaded. So in the first half, we would expect some under-absorption of costs. You know, I'd say $1 to $2 million range. And then, really, that second half, when you think of third quarter, you're starting to get – you have some under-absorption in Q3, but getting closer to that break even. And certainly, Q4, we'd be in the, you know, the green or the black, right? And really, for the whole year, that offsets what you'd see primarily in the first half. You know, again, most of these projects that we've been launching and working on over the last, let's call it 12 to 18 months, are really taking shape and hold and launching in the second half of the year. So that's when we'll start to see the utilization happening. And again, break even for the year, but as we exit Q4 at that $100 million run rate.

Good, good. Yeah, I'll keep my $3 million through nine months. But do you expect the raw material pass-throughs and scrap prices to be neutral this year? I know they were direct last year.

Yes, that is our expectation. And one of the items that I commented on was that our assumption is material pricing and scrap income pricing will be stable. Now, we don't expect any changes. But again, material pricing, keep in mind, is a pass-through to our customers. So the risk of when prices rise or decline really is very minimal.

Good, good. And just one last one for Jag, and I'll hand over the questions. Just on energy transition, I just think it's so interesting for you. You have that customer when it was pretty big for battery thermal management in Hazel Park. Could Jag just maybe elaborate maybe more on like some specific end markets and types of products you're working on for the lightweight deposits, aluminum, just the whole energy transition topic, if you can kind of give us a little sneak peek.

Yeah, just a reminder, right, we do not play in passenger vehicles, right? So that's, I want to put that out there, right? There's a lot of news over the last six to nine months around the passenger end markets on EVs, et cetera, right? We have no exposure in that space. Now our business development has been mostly around commercial vehicles, potentially powersports, and potentially other end markets. We have taken two approaches, right? One, we're directly working with a couple of CV customers and powersports customers as they transition their platforms to battery electric vehicles. So we're directly supplying components to their EV platforms. Secondly, the other customer we have mentioned in the past, right, who's got multiple systems that they're deploying into multiple vehicle platforms. And we're continuing to supply components to them. And then they're putting them together as sub-assemblies or assemblies, and then they're supplying to other end users and other OEMs. So we're participating in this energy transition both directly and indirectly. Coming back to some of our legacy customers, as our legacy customers, particularly in the CV market, right, as they refresh their platforms, they're looking to add more and more lightweight materials, even in non-battery electric platforms. But also, as they transition to battery electric platforms, we're finding opportunities to supply aluminum extrusions, aluminum fabrications into the CV market. I just want to mention that we have gotten multiple customer codes. What that means is they have qualified MSA as a supplier. That's the first step. We have completed IATF certifications and other qualifications for the facilities that MSA operates. So all of this will help us continue to win. We did talk about last quarter a significant win in the CV market for MSA, and we continue to pursue additional CV opportunities and powersports opportunities with MSA capabilities.

That's terrific, and thanks. And I'd love to set up a -- possibly, hopefully, conservative organic sales growth guidance this year, depending on macro. But that's it for my questions. Thanks.

Thank you, Tim. Thanks.

Thank you. The next question goes to Ted Jackson of Northland Securities. Ted, please go ahead. Your line is open.

Good morning, Ted.

Thanks very much. Good morning. Hey, so the fun questions I had have been asked, but I got a couple of small ones for you. The first one, just kind of switching back over to the commercial vehicle business and the guidance you gave, are you expecting the second half of your sales in that category to be down relative to the first half? Is that what I – when I listened, is that what I should be thinking about as I read below my model?

Yeah, I think that's a fair assumption, Ted. I think the base business, obviously, is going to be down. The market is going to be down 16%. We're expecting the first quarter to be reasonably good, given the strong backlog and order rates. I think yesterday or so, ACT released another report saying that the February orders held. So, I think Q1, we expect it to be pretty good. Q2 will be okay, and then we expect Q3 and Q4 for the base CV business to continue that decline. I mean, we can't really predict which month or quarter exactly the downturn will be, but it will be second half. Having said that, we have launched fuel tanks for one of our top customers, as we mentioned last time. So, all of that will continue to ramp and should offset some of the declines in the second half with some of the new program launches that we have.

Okay. Simple question for Todd. What do you think the tax rate -- where do you see the tax rate for 2024?

Well, certainly, as we wrapped up our 2022 tax returns, which were filed in October, we had found some opportunities on research and development, smaller credits that we could utilize. So, we did have a little bit of benefit in the fourth quarter from those activities. As you look into the forward guidance to get 2024 and beyond, I would continue to say that it's 27%. We think of 21% federal and about your 6%, 7% state tax rate. So, we're going to do everything we can to hopefully minimize those impacts, but I think as you model that or look at it, to try to go out on a limb and say we can beat the effective tax rate every quarter is probably a bit difficult.

Okay. And then something maybe a little more entertaining, but just skipping over the military segment in terms of top line. I mean, there was nothing really changing in regards to your guidance, but given the fact that the world just is increasingly a more dangerous place and we've got two wars of substance going on. And all this concern with regards to Taiwan, is there anything that you see on the horizon that would result in a shift in your guidance? I mean, if Congress was to actually get its act together and pass funding and actually give Ukraine money and Israel money, would that change anything here? Is there anything kind of out there that would say, well, we have some wind in our sails, or is there nothing that would change your outlook for that segment?

Yeah. Ted, I don't think even if there's a funding release for these two major conflicts get done this year, right? I don't think that will change our outlook. Specifically, we're already on two major programs, right? One is JLTV, other is Humvee, right? So those are two major programs that we're on. We had a significant program that came to an end at the end of last year that will not repeat. And that's the reason why we're being fairly prudent about our forecast in the military market. JLTV program is transitioning from one customer to another customer. And then in general is our Humvee producer, right? They're taking over the JLTV program. So we expect that's actually a tailwind for us, but given that we will have more content in the new OEM versus the current OEM, but that program doesn't kick in, the volumes don't kick in until sometime in 2025, right? So that's why 2024, I think, in our forecast is pretty stable and reasonable, and where we sit here and then see how this market is going to perform in 2024.

Okay, that's it for me. Thanks very much.

Thank you, Ted.

Thanks, Ted.

Thank you. The next question goes to Larry De Mari of William Blair. Larry, please go ahead. Your line is open.

Thanks. Good morning, everybody.

Good morning, Larry.

Hey. Hazel Park, obviously, you seem to have confidence in getting towards that 100 million run rate. I guess, real question is how much of it is already booked versus go get? And I assume most of it at this point is sort of in the backlog?

Yeah. So as we indicated in the past, Larry, approximately 75 million of that 100 million is booked. And we feverishly continue to launch those programs. And we expect we'll be able to fill the other delta with new programs that we continue to win and pursue, but also potentially other transfers based on customer requirements, where we may put a new program in a different plant and then may end up moving some of that volume into Hazel Park based on customer requests and other factors. But otherwise, we feel pretty confident about filling that 100 million pipeline with new business.

Okay. But in other words, there hasn't been any change from the 75 of the 100 books since the last time?

No. We continue to win new programs and we'll continue to look at in a way to slot those programs.

Okay. Thanks. And then obviously, we discussed some of this already in the call, but there's a lot going on this year with MSA, Hazel, some, mixed end markets, but new wins in the outperformers. Can you give a little bit more, maybe a finer point on the cadence of the year for sales and margins, even if it's first half, second half, obviously because in the back half you have CV rolling off, but you have Hazel Park ramping up and maybe that margin hasn't been going away. So, I don't know, any kind of color around the actual cadence for the year, like I said, even if it's first half, second half instead of quarterly would be helpful.

Yeah. So, Larry, when you think of first half sale from a top line perspective, we would expect sequentially come out of Q4, Q1, like I stated being up, 2% to 4%, second quarter sequentially up a few percentage points versus first quarter. But then, and again, your first half is up, right? As you look at the second half, certainly we're going to see some declines in the CV market that 16% annualized reduction rate really begins in the second half. And so with that, even though we have new project launches buffering that, we do expect to see a little bit of sales decline in the second half. And then when you think of fourth quarter, just because it's shorter number of days and then planned shutdowns that customers do each year around the holidays, we would expect to see even a little more top line reduction. Now, it doesn't matter, volumes in the normalized course are really changing. It's just a matter of cadence and then certainly CV market being a big driver of that. When you think of even a margin progression Q1 for the most part will be a little bit down as you compare to Q4. And the reason is, I mean, some of it is again, it's a risk adjusted budget. We are expecting our healthcare to have significant increases this year, and that's been contemplated in the guidance, as well as the compliance costs that we had mentioned earlier, that really started, you know, Q1, day one, when you think of not only SOX integration or migration, but also, you know, cybersecurity measures and other things that we're putting in place. So we will be at the higher end of SG&A percentage for '24. And then when you think of that margin profile, sequentially, it'll begin to grow. And it's a little bit muted in the second half, because keep in mind, even though Hazel Park will improve, and we'll get better utilization there, with the CV market declining, some of our other plants will have less volume. And not that there'll be an under-absorbed position, but certainly, it does put a little pressure and negate some of the impact of the Hazel Park launch. So again, sequentially, after Q1, we would expect to see margins even up, margin percentage improve. And when you think of SG&A expenses, it's really a step cost. You know, this is the kind of transitional year. As we look into '25 and '26, we expect to be in that low end, 4.5% to 5%, because we're not going to have that incremental step up going forward.

Okay, thanks. And then just to clarify, we should expect Hazel Park to generate around 25 million sales in 4Q. Is that about right? Based on the obviously 100 million run rate?

That's the current plan, Larry.

And will that be a kind of normalized margin, or there'll still be some friction in the fourth quarter?

There'll be a little bit of friction in the fourth quarter. Certainly, it'll be a positive net income or even a result, but it will be still progressing through the quarter. So as you think of the ending Q3, we'll still be, going through the volume ramp ups as we enter Q4. So there'll be a little bit of drag yet happening.

Okay, very good. Thank you. Good luck.

Thank you. Thanks, Larry.

Thank you. [Operator Instructions]. It appears we have no further questions. I'll now hand back to Jag for any closing comments.

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 Investor Relations Council. This concludes our call today. You may now disconnect.

Thank you. This now concludes today's call. Thank you for joining. You may now disconnect your lines.