Mayville Engineering Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 9 speakers on the call.

Operator

Thank you all for joining. I'd like to welcome you all to the Mayville Engineering Company Third Quarter 2023 Earnings Call. My name is Brica, and I will be the moderator for today's call. All lines are on mute for the presentation portion of the call with an opportunity for questions and answers at the end today. I would now like to pass the conference over to your host, Stefan Neely to begin.

Operator

So Stefan, please go ahead.

Speaker 1

Thank you, operator. On behalf of our entire team, I'd like to welcome you to our Q3 2023 results conference call. Leading the call today is MEX 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.

Speaker 1

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 mechinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jack.

Speaker 2

Thank you, Stefan, and welcome to those joining us on the call and webcast. As anticipated, our 3rd quarter results demonstrated Significant year over year growth in revenues, adjusted EBITDA and the free cash flow. These strong results were the product of continued Steady end market demand and targeted market share gains, particularly in our commercial vehicle, military and powersports markets. Early in the Q3, we closed on the acquisition of Midstage Aluminum or MSA, which was also a contributor 2, our revenue and earnings growth in the 3rd quarter. In addition to the cross selling opportunities afforded by MSA's aluminum fabrication and Extrusion capabilities, our core business continues to enjoy a robust sales pipeline entering 2024.

Speaker 2

Even as we look forward into a potentially more muted environment for end market growth, we are optimistic about our ability to deliver above market growth through the cycle by expanding our share of wallet with our current customers and improving the utilization of our existing assets. Importantly, our operational and commercial self help initiatives are continuing to deliver improved profitability and cash generation through improved cost absorption, value based pricing and enhanced working capital efficiency. During the Q3, we generated a record $16,100,000 of free cash flow, representing cash conversion in excess of 80%, a new record for our business. Consistent with our capital allocation priorities, we reduced our outstanding borrowings by more than $17,000,000 in the 3rd quarter, while repurchasing $1,000,000 worth of common equity, leaving $17,000,000 under our existing 25,000,000 Authorization as of September 30. This year alone, we have repurchased $2,000,000 worth of shares under our existing authorization.

Speaker 2

In September, we hosted our inaugural Investor Day event at our Hazel Park facility Outside of Metro Detroit, of the event, we introduced a 3 year roadmap for MEC, one that leverages The key pillars of our MDx framework to drive long term value creation for our shareholders. At the event, we underscore how we intend to drive organic sales growth, adjusted EBITDA margin and improved free cash flow generation while continuing to develop a leading manufacturing platform of scale within key growth markets such as energy transition. As a team, we are committed to excellence through accountability And introduce new 3 year financial targets at the event, which our entire team is focused on achieving. By the year end 2026, we expect to deliver between $105,000,000 $135,000,000 of annual adjusted EBITDA Along with annual net sales between $750,000,000 $850,000,000 Adjusted EBITDA margins between 14% to 16% and annual free cash flow generation of $65,000,000 to $75,000,000 While these are ambitious targets, they are entirely achievable. Our 3rd quarter results demonstrate early progress towards this plan.

Speaker 2

We remain focused on delivering ratable consistent growth into 2024 building upon our track record of execution. While we are very pleased with our 3rd quarter performance, it is important to highlight that these results include Continued cost under absorption associated with planned ramp ups at our Hazel Park and Atkins facilities. Fixed cost under absorption at Hazel Park alone impacted the 3rd quarter adjusted EBITDA and adjusted EBITDA margin by 1,700,000 and 110 basis points respectively. Excluding the impact of the Hazel Park ramp up, our normalized adjusted EBITDA was 13.2%. We continue to expect that Hazle Park will ramp up fully by the end of 2024, Contributing $100,000,000 in annual revenues with adjusted EBITDA margins of approximately 15% in 2025.

Speaker 2

As of September 30, we currently had commitment for all but approximately 25,000,000 Of the projected $100,000,000 in annual revenue contribution of that facility. Turning now to a review of market conditions Across our 5 primary end markets. Let's begin with commercial vehicle market, which represents approximately 40% of our trailing 12 month revenues. During the Q3, commercial vehicle revenue increased 6.6% on a year over year basis, Driven by strong demand and elevated build rates, customer demand requirements continue to indicate Slowing demand going into the end of the year and into 2024 as the industry navigates regulatory changes as well as A general slowing in economic activity. Currently, ACT Research forecasts the Class 8 Vehicle production to increase 6.6 percent year over year in 2023 to 336,000 units.

Speaker 2

The current projection indicates that build rates will slow during the Q4 and decline by nearly 4% on a year over year basis. For 2024, ACT projections reflect a deeper softening in demand through the middle of the year, with current production estimates reflecting an 18.5% decline for the full year 2024. Furthermore, we are currently experiencing volume disruptions associated with the United Auto Workers strike with 1 of our customers. This has impacted our volumes for their products so far during the Q4 and will continue to do so until an agreement is reached. Next is the construction and access market, which represented approximately 18% of our trailing 12 month revenues.

Speaker 2

Construction and Access revenue declined 2.3% on a year over year basis in the 3rd quarter, Given weaker fundamentals within the residential housing market, which continues to be impacted by the elevated interest rate environment, While residential construction trends appear to have troughed and infrastructure and energy market demand remains stable, We still expect to see demand softness year over year through the remainder of 2023 and into 2024 with the potential for modest improvement later in 2024. The powersports market represented approximately 16% of our trailing 12 month revenues and increased by 7.7% on a year over year basis in the 3rd quarter. We continue to benefit from market share gains, which include new customer programs, which were partially offset by cooling In consumer discretionary spending, given current market conditions, we anticipate customers will seek to bolster demand through rebates and incentives going into the holiday season. As we look forward into 2024, indications are that continued Slowing in demand will result in growth deceleration as dealer inventory levels have normalized. Our agriculture market represented approximately 10% of trailing 12 month revenues and increased 4.6% on a year over year basis during the Q3.

Speaker 2

The increase during the quarter was primarily driven by Growth in large ag demand along with contribution of MSA's ag related sales, which offset continued overall softness In our legacy small ag market, this trend is in line with our expectations as global food stocks remain tight And crop prices remain elevated. Given elevated crop prices, we believe producer demand will increase Through the end of the year and into 2024 with some deceleration going into the middle of 2024. The demand tailwinds in large ag going into 2024 should mostly offset softness in small ag demand. Our military market represented approximately 6% of trailing 12 month revenues and increased 70% on a year over year basis in the Q3 driven by new program wins and build rate increases. Our customers have solid contractual backlogs with the U.

Speaker 2

S. Government and we continue to see good volumes based on new vehicle introductions and related programs. However, we foresee volume growth moderating during the Q4 and into 2024 due to the expected expiration of some legacy projects. I would also point out that with the completion of MSA acquisition During the quarter, the majority of MSA revenues are represented within our other end market category, which grew by over 12,000,000 year over year in the Q3. The MSA acquisition closed on July 1 and since then our teams have been hard at work with integration and cross selling activities.

Speaker 2

Overall, the MSA integration is going well and we are on track to have them fully integrated by the end of the year as expected. Importantly, as we highlighted at our Investor Day, we see MSA generating over $100,000,000 of sales by 2026 with at least $25,000,000 coming from revenue synergies with legacy MEC customers. As of end of September, we are progressing as expected towards that target as well as the expected cost synergies that we are targeting through the implementation of our MBX lean manufacturing framework and MSA. Shifting now to an update on our MBX initiative. During the Q3, we continued to progress in the implementation of our MBX value creation framework.

Speaker 2

I am pleased to report that we are on track to achieve the objectives we laid out last fall when we first announced the MBX framework. As we highlighted at our Investor Day, MBX is rooted in organic commercial growth, improved cost absorption Through lean manufacturing practices, value based pricing and working capital efficiency, these key areas of self help initiatives will allow us High growth adjacent markets including clean technologies and energy transition in addition to expanding our share of wallet among our current customer base. Achieving this goal is dependent on improved utilization of our equipment through better labor productivity as well as utilizing existing capacity at MSA and Hazel Park. Allow me to share some of the commercial milestones we achieved during the Q3. Starting out, we are Pleased to report that we have been awarded purchase orders for our first cross selling win after the acquisition of MSA.

Speaker 2

Our first award was in the commercial vehicle space, which was the largest market opportunity within our cross selling targets. We have continued to build momentum in our code activity and we expect to continue to win awards for the coming quarters. During the Q3, we continued the expansion of our customer relationship to supply battery thermal management products to multiple end customers as the EV transition continues to progress. This relationship will continue to expand as our customer grows their Electric vehicle battery systems, while we also are starting to work on significant outsourcing programs with this customer. In the quarter, we further expanded a new customer relationship in the powersports market with new program wins on new products.

Speaker 2

We expect to see continued significant growth with this new customer relationship as we look ahead into 2024. We also made progress on securing additional market share within our large ag and construction customer. These new parts were related to next generation products and continue to build momentum on winning new business with the capacity we have installed in Hazel Park. We have continued to gain additional market share as our commercial vehicle customers plan for their vehicle updates both are next generation products and battery electric vehicle platforms. We expect to continue to grow share over the next 2 years with the amount of change that will occur in this industry.

Speaker 2

As we highlighted during our Investor Day, Our 2026 net sales targets are dependent on capturing incremental customer commitments of $65,000,000 to 125,000,000 including MSA cross selling synergies. Based on our current level of sales activity and recent wins, We remain confident that this is achievable. The other pillar of MBX is commercial excellence, where our focus is to implement Strategic and value based pricing models across our customer programs. Year to date, the teams have been working tirelessly to implement A programmatic pricing model. On the operational excellence front, we have continued our rigorous implementation approach Centered around our quarterly President's Kaizen's supplemented by monthly operational and commercial excellence Kaizen's.

Speaker 2

During the Q3, we completed 25 kaizen's with a focus on sustainability of cost savings measures identified. Overall, our team has performed over 100 MBx lean events through the end of the third quarter. These savings put us on track to achieve the 40 to 70 basis points of margin improvement reflected in our 2023 guidance as well as the 100 basis points to 150 basis points of margin improvement we expect to achieve by 2026. Given the current demand environment, the execution we have achieved with our MBX initiatives and the ongoing ramp up of new program launches, We continue to expect consistent margin performance and free cash flow conversion to close out the year. Looking ahead to 2024, we anticipate some modest softening across our end markets given broader expectations for a general slowing in the U.

Speaker 2

S. Economic growth next year. However, we anticipate Ongoing operational and commercial growth initiatives will position us to deliver above market growth. Our ability to deliver above market growth into 2024 depends in part on driving improved asset optimization across our system, Continued price discipline and sustained cost management, all of which were on pace to deliver. 2024 will be a year of ratable progress for us, one where we expect to begin to fully realize the benefits of MBX initiatives, which are expected to support sustained organic growth, margin expansion and improved working capital efficiency.

Speaker 2

As before, we intend to prioritize cash generation towards aggressive reduction in outstanding borrowings, Putting us on pace to achieve a net leverage ratio between 1.5x and 2.0x by the end of 2024. Since the announcement of the MSA acquisition, we have received numerous indications of interest from potential acquisition candidates, many of which fit nicely within our acquisition criteria for lightweight materials and high growth end market exposure. While we will continue to build a solid funnel of high quality acquisition candidates, our chief focus Or the near term will be on reducing net leverage to ensure continued balance sheet optionality through the cycle. In summary, as I have highlighted today, we delivered on several important strategic growth milestones during the Q3, all of which play a role in building a leading integrated solutions platform Equipped to take share in higher value underserved growth markets. As a team, we remain Highly focused on delivering a high CEDU ratio, one where a continued focus on program execution is at the center of all we do.

Speaker 2

Collectively, we remain focused on delivering a superior return on invested capital whether through organic investments, acquisitions or the repurchase of our own common equity. As we look to the coming year, we will continue to hone and refine our approach to Capital allocation as we seek to maximize value for all of our shareholders. With that, I will now turn the call over To Todd to review our financial results.

Speaker 3

Thank you, Jag. I'll begin my prepared remarks with an overview of our Q3 financial performance, followed by an update on our balance sheet and liquidity. Total sales for the 3rd quarter increased 16.1% On a year over year basis to $158,200,000 driven by a combination of the MSA acquisition and improved organic sales volumes, partially offset by softening demand in our construction and agricultural end markets. When excluding the MSA acquisition, organic net sales growth was 6.2% on a year over year basis. Our manufacturing margin was $19,000,000 in the 3rd quarter as compared to $15,500,000 in the same prior year period.

Speaker 3

The increase was primarily driven by increased organic volumes, MDX initiatives and the acquisition of MSA, offset by unabsorbed fixed costs associated with new project launches and an $891,000 negative impact from the inventory valuation step up associated with MSA. Our manufacturing margin rate was 12% for the Q3 of 2023 as compared to 11.3% for the prior year period or an increase of 70 basis points. When excluding the impact of the unabsorbed fixed costs and the inventory adjustment, Our manufacturing margin would have been 13.7 percent or an increase of 2 40 basis points as compared to the prior year period. Profit sharing, bonus and deferred compensation expenses increased by $2,200,000 to $2,300,000 for the Q3 of 2023, which was driven by the lower stock based compensation expense in the prior year period due to forfeitures of unvested awards. Other selling, general and administrative expenses were $8,600,000 for the Q3 of 2023 as compared to $6,500,000 The same prior year period.

Speaker 3

The increase was driven by $1,000,000 of legal expenses relating to our former fitness customer, $500,000 of transaction costs associated with the MSA acquisition and increased salaries, wages and benefits. As we highlighted at our Investor Day in September, we believe that SG and A expenses in the near term will be between 4.5% to 5.5% of net sales As our public company costs increase as we work through meeting SOX compliance requirements. In the longer term, we expect operating leverage We'll drive our SG and A down to between 4.5% and 5% of net sales by 2026. Interest expense was $3,900,000 for the Q3 of 2023 as compared to $830,000 in the prior year period due to higher interest rates and higher borrowings under our credit facility. The increases in borrowings is due to the acquisition of MSA, which closed on July 1, 2023.

Speaker 3

Given our current net leverage, we are subject to a higher spread on our floating rate debt, Combined with higher sulfur rates resulted in the elevated interest rate during the quarter. As we continue to pay down our debt, We expect that interest expense will continue to decline, not only due to lower borrowings, but also because of the step down in our spread as a result of declining net leverage. Adjusted EBITDA increased to $19,200,000 versus $16,100,000 for the same prior year period. Adjusted EBITDA margin percent increased by 30 basis points to 12.1% in the current quarter as compared to 11.8% for the same prior year period. The increase in our adjusted EBITDA margin was primarily due to increased organic volumes, MBX initiatives and the MSA acquisition, partially offset by $500,000 of a higher under absorbed fixed cost at Hazel Park.

Speaker 3

Adjusted EBITDA margin progression is evident and demonstrates early advancement towards our 2026 goal of 14% to 16%. Turning now to our statement of cash flows and balance sheet. Free cash flow during the Q3 of 2023 was $16,100,000 as compared to $5,200,000 in the prior year period. As Jake mentioned, free cash flow generation for the quarter was the highest in any quarter since the IPO and represented a conversion rate of 84 percent of adjusted EBITDA. The improvement in free cash flow year over year Was primarily due to the $8,900,000 decrease in capital expenditures resulting from the completion of the Hazel Park facility And improved inventory turns as we continue to implement lean inventory management processes.

Speaker 3

With the heavy capital investment cycle in 2022 behind us, We are focused on improving working capital and we were able to generate strong free cash flow results that put us on pace to meet our second half of the year free cash flow goal of $25,000,000 to $35,000,000 and show significant progress towards our 2026 free cash flow target of $65,000,000 to 75,000,000 As of the end of Q3 of 2023, our net debt, which includes bank debt, financing agreements, Finance lease obligations and cash and cash equivalents was $169,600,000 as compared to $74,000,000 at the end of the Q3 of 2022 and resulted in a net leverage ratio of 2.46 times as of September 30. As we have stated previously, it is our intention to use free cash flow generation to reduce our net leverage ratio Between 1.5 times and 2 times by the end of 2024. And during the Q3 alone, we repaid approximately $17,000,000 of borrowings Using available free cash flow. In light of our Q3 results and the outlook for the rest of the year, we are reiterating our financial guidance for the full year 2023. For the full year 2023, we continue to expect the following: net sales of between $580,000,000 $610,000,000 Adjusted EBITDA of between $66,000,000 $71,000,000 capital expenditures of between $15,000,000 $20,000,000 Our current full year 2023 guidance does not include any impact from the ongoing strikes within the CV and auto industries.

Speaker 3

Beginning in November, we estimate these strikes could negatively impact net sales by approximately $6,000,000 to $7,000,000 per month and adjusted EBITDA by $1,000,000 to $2,000,000 per month. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.

Operator

Thank We have the first question from Vlad Boryszczyuszki from Citigroup. Please go ahead when you're ready.

Speaker 4

Good morning, guys. Thanks for taking my call. How are you?

Speaker 2

Good morning, Matt. How are you?

Speaker 4

Great. Thanks. So thanks for all the information and the update today. Maybe just Since you've given some initial thoughts on 2024 here, any color on How we should be thinking about raw material pass throughs impacting 2024 just given where raws are today?

Speaker 2

Sure. I think a week ago, Vlad walked into this call on Friday, I would have said, Hey, no change. We have stable steel prices and we're expecting some price stability Given that almost in the past year, right, steel prices have stayed relatively calm. But as Markets have shown in the last few days, as steelmakers continue to curtail supply, We are seeing a bit of a spike in our steel prices. We don't expect that to last Through 2024, but we are seeing a bit of a spike in the last week or so.

Speaker 2

We're expecting things to stabilize In 2024.

Speaker 3

And Vlad, I would just comment that we wouldn't expect it to have the impact that it did in 2021 and 2022. Certainly, there's been a little bit of an uptick, but the fluctuation isn't as steep as been previously. So again, As we look at the 2024, we don't see that a real large impact, but again, it's a pass through and we'll disclose it going forward each quarter.

Speaker 4

Okay, great. That's helpful. Thanks guys. And then just on the quarter and into year end here, you talked about Supply chain constraints still impacting some customers. So can you just talk about sort of How you'd characterize visibility from your OEM customers in the current environment and If you're seeing changes in their order patterns or any increasing stability that could be helpful to your own manufacturing operations.

Speaker 2

Sure. I would say that in Q3, we did not see any significant Customer supply chain disruption. So for us, it feels like things have come down and we saw relatively In a normal order flow. Coming into Q4, we are not expecting any significant changes on And changes on that front either. Having said that, probably the last sentence on Todd's in Todd's remarks, right, if you caught it, we have obviously exposure to Some customers who are experiencing some UAW strike disruptions.

Speaker 2

I would say that by through the end of October, Our impact has been minimal. And auto exposure we have now, we can say that in rest of Q4 will be again minimal given that the strikes have been at least looks like they're going to be settled. Other CV customer that continues to be down because of the UAW strike. We're optimistic that Given the conclusion of the other big three contract negotiations that our CD customer could also wrap up There are negotiations in the short term, but if that continues on, we expect some impact, as Todd mentioned in his prepared remarks, In Q4. Outside of those events, we do not expect any disruptions from any supply chain issues or otherwise.

Speaker 2

Going into 2024, we have not seen any indications of softness Per se in or close our purchase orders or any of EDI feeds we normally see. But the conversations Have been a little muted from some of our customers, even though the order flows haven't changed, the demand picture hasn't changed. So given the discussions about macroeconomic conditions, high interest rates, consumer demands Slowing with all of these, we're walking into 2024 on a cautious note. As we mentioned, we continue to expect To perform, our revenue growth to be above market growth next year, Given our market share gains and new program wins and start up of multiple long term programs in both Hazel Park, Atkins and other locations within the company.

Speaker 4

Okay. That's really helpful color guys. Thanks. Thank you.

Speaker 2

Thank you.

Operator

We now have your next question comes from Nick DeBray of Baird. Please go ahead.

Speaker 5

Thank you and good morning everyone. I want to tack on that last Point that you made there, Jag, about 24 and about your specific outgrowth drivers. Is there a way to Update us or kind of quantify, knowing what you know today in terms of business that you guys have booked or programs, incremental programs that you have booked As to what the revenue benefit in 2024 relative to 23 would be from the business that you already kind of have Visibility

Speaker 2

on? Yes, Mig. Good morning again. We were not in a position to provide any guidance on 2020 So at this point, having said that, we remain committed to the 3 year revenue, EBITDA and cash flow targets we laid out recently at our Investor Day. We continue to expect Progress towards that goals even with a perhaps muted 2024 growth picture.

Speaker 2

So we expect 2024 to be a growth year for MEK. We expect to grow above market Next year, both top line and margin expansion and cash flow generation as well. So we're Pretty optimistic about 2024, but we're not in a position to provide any particular guidance at this point.

Speaker 5

Yes. Well, and I appreciate that. And I wasn't necessarily wanting to pin you down on guidance for 2024. It was more Trying to understand, it's November, right? So you probably have a pretty decent idea in terms of the incremental Programs that you have that you know will start flowing into 2024 because your macro commentary is obviously more cautious Than it was before.

Speaker 5

So I think we're all trying to figure out what NEX specifically can do to sort of offset This more difficult macro setup, if you would.

Speaker 2

Yes. No. Okay. So on Slide 5 in our deck that we Put out this morning or last night, you can see that we're projecting most of our End markets to be either down or slightly flat. And we're projecting our powersports Market to be up, even though the market is going to be down, up significantly given our new program starts that we discussed multiple times in the last Couple of quarters and at our Investor Day.

Speaker 2

Similarly, our commercial vehicles also, even though the market may be down good 18%, 18.5 Percent is what ACT is projecting. That market is going to be down next year. We're expecting at least to be flat in 2024. Similarly, Construction and Access, we're sixty-forty Construction and Access. That's how we break out our revenues.

Speaker 2

We expect access market to be pretty good going into 2024 given the customer comments that we heard in their Public comments recently. Construction residential construction obviously is down, but we have other Programs that we're on that gives us confidence that we will at least be as a second segment, we will at least be flat next year. Similarly, ag, residential small ag is down, but large ag and then addition from MSA ag Demand of sorry, revenues as well will continues to give us at least a flattish picture Next year in our ag markets as well. And military is a small segment. We expect to be up given some new program wins.

Speaker 2

So overall, that's why it gives us confidence that even though the end markets might be down next year, right, we will perform above our end market averages.

Speaker 5

Okay. And sort of sticking with the Slide 5 and the way the mix, The revenue mix is going to be evolving between these verticals. Is there any insight to be gained in terms of what that looks like from a margin standpoint? I mean like military for If it's growing quite a bit, is that positive for margin, for mix or not?

Speaker 2

It's I would say, generally speaking, maybe slightly accretive when the mix change for next year, Mig.

Speaker 3

I would just add that generally speaking, our margin performance in each segment is very similar. Maybe within 1 or 2 points, it isn't like creating 35% margin in one market, 15% in another. So it's very Similar across the board.

Speaker 5

Okay, understood. Then last question, just a clarification around this UAW strike. So your guidance for the Q4, does that assume any drag From the strike like for instance in the month of November or not? You're just sort of quantifying it, but it's not factored into the numbers yet.

Speaker 3

It has not been factored into the guidance. In a normal course, we would expect to be within our original guidance. Now if this The strike was rotten as again, hopefully they get settled here in the near term. If that is prolonged, that would most likely result in about $6,000,000 to $7,000,000 per month of lost sales and about $1,000,000 to $2,000,000 of EBITDA impact, which again has not been factored into our guidance.

Speaker 2

And just to reinforce the point that in October, even though most of the month of October, the customer was not taking Not running rather, inter production lines, we were able to offset our COBRA volumes with Aftermarket production, etcetera, that helped us continue to run our production lines in the month of October. So if it gets settled in the next week or so, right, I think we'll be okay. But if it continues to drag on to the 2nd, 3rd weeks of November, Then we will expect impact at SoftBank by time.

Speaker 5

That's clear. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from Ted Jackson of Northland Securities.

Speaker 6

Thanks very much for taking my question. So just a couple of questions. The UAW one that you just answered was one of them, but I got 2 more.

Speaker 5

When you first of all, when

Speaker 6

you talk about growth in 2024 that you're expecting to grow as a business, Are you I'm a little confused, is that organic or is that growth are you talking about just growth MSA, The whole combined thing vis a vis 2023. I mean, are we talking organic growth kind of ex MSA acquisition or normalized for it? Is that what you're or are you saying just you're just talking about the raw number?

Speaker 2

Yes. So it's a really good question, Ed. We're expecting organic growth in addition to the lapping of MSA first half revenues.

Speaker 6

Okay. Okay. I just I didn't want to assume that, but I did want to assume that. So then just excuse me, A little more color, if you would, on the commercial vehicle market itself. I know the macro outlook you provided Previously it was 23, and now we're looking at 24, and I understand the dynamics with regards to the pull forward of demand as a result of all the regulatory changes for emissions.

Speaker 6

You also have seen new product wins within the commercial market itself. Can you provide some color with regards to what where you see that business Going for you as you roll through 2024, I mean you're saying you think you can keep it flat. I mean so if I was to just take your commercial vehicle Revenue for 'twenty three and as a baseline, a worst case scenario, given what you know today, you'd see no growth in that. Would that is that kind of what you're saying with it? And if you were to see growth on top of 23.

Speaker 6

Is there something that would happen that would drive that? Is there something Your backlog or kind of your dialogue with customers and stuff that would make that a growth business for you. I mean, it's your biggest vertical. So a little more maybe Discussion around that might be worthwhile.

Speaker 2

Yes, that's a good question to ask Walt, Ted. As we said, our ACT set, Commercial vehicle volumes will be down 18.5% in 2024. That's our current expectations. Given our new program wins, including new tank production volume that's going to come online in Q1 of next year And that's the outsourcing win we talked about. And then other program wins, we expect to be flat In our commercial vehicle revenues next year.

Speaker 2

That's our current expectation.

Speaker 6

Okay. And then remind me, I mean, I've seen this before, but it's been a long time ago. It's not like this is the first time that we've had this kind of scenario within commercial vehicles Where regulations change and you get a lot of forward buying, it happens every time that this kind of every time that regs change. How long does it usually take for the market to kind of go back to normalized? I mean, is it like a phenomenon that then All else being equal, let's ignore the macro of the economy and whatever and that we get through 'twenty four and then we get back to kind of like a base market growth rate.

Speaker 6

How much How much demand gets called forward when the government makes those changes typically?

Speaker 2

Yes. I would say that Typically, it's about a year when the markets sort of go down and then curve back to normal levels. We're expecting, obviously, right, 2024 to be the down year. Even looking at quarter by quarter, we The softness to sort of hit mid year and second half to be a little lower than first half of And then 2025, the volumes are expected to come back up to normalized levels. And I don't think we have a number from ACT yet, But our expectation is going to be somewhere north of $300,000 in 2025.

Speaker 2

Actually, I do have a number from ACT. The numbers are in 2025 are expected to be around 316 ks units. 2022 was 316 ks, 2023 is the 336 ks and 2024 is the 274 ks, right. So you can see that dip. So there was a pull in in 2023, pull back in 2024 and then back to a normalized levels of 316 in 2025.

Speaker 6

That is great data. All right. Hey, thanks very much guys.

Speaker 2

Thank you, Jeff. Thanks, Jeff.

Operator

Thank you. We now have Tim Moore of ER Patents.

Speaker 7

Thanks again for the Investor Day 20 Good morning. Good morning. Thanks for those Investor Day goals and those credible bridges for your roadmap for EBITDA margin expansion and free cash flow. I just had a hypothetical question to start out here. Regarding the auto worker strikes, and if something like this occurs next year For a different end market or even a large customer disruption, maybe there's a mild recession in the spring or something.

Speaker 7

How much flexibility do you have to maybe shift some of the capacity or stalled works to other end markets to backfill that in And cut overtime costs, I think you might have said on Investor Day about 20% overtime mix, but maybe you could flex it to 10.

Speaker 2

Great question, Tim. Yes, we were averaging approximately 20 ish percent over time in many of our Our long term goal, our target is to be around 15% or so, of flex time or overtime rather, Right. So immediately, we can shut off the overtime. And also, we have the flexibility It's freeze hiring. We still have about 100 job openings across the company as we speak today, And we can quickly free some of those hiring plans, but also we have the flexibility to Switch our operations from producing from one end market to another end market.

Speaker 2

Given that Majority of our plans, in fact, outside of 2 plants or majority of our plant, 18 plus plants, We can make parts for any end market. So that gives us the flexibility To quickly switch our customer focus or end market utilization of those assets, So those are the levers we have and no one expects any black swan events or anything like that in the near term, at least we don't know. But if something like that happens, we have the ability to quickly switch gears and shift our focus.

Speaker 7

Great, Jag. That's good contingency planning. And nice to hear a lot of companies actually can't do that, but it works easily. What about Jag on, now that you finished Kaizen just spent time on all your plans to implement MBX. How would you kind of quantify maybe what inning your value base and strategic pricing is?

Speaker 7

Is it Mostly implemented for contract pricing, fresh start in January or do you feel like you won't really fully achieve that maybe to

Speaker 6

next summer?

Speaker 2

So a couple of things. We're just getting started on our MDx implementation and our guidance are ongoing every quarter, Every month in every plant, right? So that's a journey. So we're never done with that. So I'm excited.

Speaker 2

In a couple of weeks, we'll have our In a few weeks, we'll have our Q4 President's Kaizen. We're going to do somewhere between 46 Kaizens across the company In Q4, so pretty exciting events coming up for us. In terms of pricing, Tim, We implemented through our commercial excellence activities and TPI Kaizans A programmatic approach to value based pricing. What that means is we have a new framework on how we think about pricing. It's everything including cost to serve, right, customers' payment terms to complexity of Their products and manufacturing processes, 2, ease of doing business with some of our customers.

Speaker 2

Some need heavy handholding, some are very easy to do business with, right? So there's a lot of criteria that we have used to You follow-up this matrix, a complex matrix and a model that we're going to use to price all future work, Right. So that doesn't include all the existing work. For the existing business that we currently have, we're continuing to do our quarterly Account reviews and looking at almost SKU by SKU and then see what our profitability is and what should our profitability B, for each of these accounts and each of these bodies of work that we currently perform for our customers. That's a long term process as you can imagine.

Speaker 2

So eventually everything will lap over the next couple of years, But all the new business that we're beginning to quote in the second half of this year are based on the new pricing framework going forward.

Speaker 7

Great, Jack. That's helpful to hear the rolling basis plus the for the existing in the future, being implemented already. At Investor Day, I believe you might have stated that there's about $115,000,000 of new sales opportunities, I guess signed or won the last 18 months maybe averaging about $20,000,000 per quarter. Everyone's familiar with your Battery Thermal Management win and it sounds like there might be another customer there for Hazel Park. But if you kind of look at your wins and maybe that $20,000,000 a quarter, The last few quarters, would you say that a lot of that's in EV related charging or is it more also Beyond that battery thermal management into wind, solar, energy grid infrastructure, what other kind of recent conversations you've been having potential customers for Emerging Technologies

Speaker 2

revenues. Yes, it's a good question as well, Tim. We continue to focus on Energy transition as a secular team within the company and then we're continuing to look for opportunities where We can go win additional business, whether it's in charging infrastructure, whether it's solar or other renewables. But I can say so far, majority of the wins have been in battery electric vehicle management applications, whether it is Through that one customer we talked about or through our existing customers in CV and Power Sports and others were there after having their platform. So majority of the wins have been in BEVs, whereas we continue to pursue opportunities Ian, both charging infrastructure and also solar and other renewables.

Speaker 7

Great. So one last question and this is more so maybe for Todd. So if this year has $5,000,000 to $7,000,000 maybe of under absorbed costs Turning on EBITDA from the Hazel Park ramp up, is it fair to assume that next year might be only $1,000,000 to $2,000,000 With none in the second half as you kind of reached that $100,000,000 sales run rate in the Q4 possibly next year as utilization clients?

Speaker 3

As Jay mentioned earlier, we're not at a point yet to provide specific guidance on 2024. But certainly, a lot of the projects that we have Really don't watch till mid and even in the back half of next year. So there will continue to be a drag in the first half, I would say. But as you really we exit the year, we're confident we're going to exit at that $100,000,000 run rate. And at that point, I wouldn't expect to see any sort of Negative impact on that facility.

Speaker 3

But at this point, again, we're not in a position to really give more specific guidance as to the cadence Of that, but I think your comments are fair. Generally speaking, I do expect it to be better next year From an underserved position, but at what point, still we have to go through the detail.

Speaker 7

Do you think, Todd, just given maybe the macro slowdown that you won't move as much stuff over to Hazel Park from some of your other facilities in the first half of the year, Besides the contract wins, but just existing business that you might move?

Speaker 3

No, I wouldn't characterize it in that frame. A lot of the new business won again that was Specifically, quoted and estimated to be at Hazel Park doesn't really launch until mid year and even to the back half. And some of those volumes really don't hit their maturity until even the beginning of 2025. The work that we've slated internally to move is still on pace. Yes.

Speaker 3

It's moving in the right cadence, and so we wouldn't make any changes on that front.

Speaker 7

Great. That's helpful clarification. Thanks Todd. Thanks Jack. That's it for my questions.

Speaker 5

Thanks Tim.

Operator

Thank you. We now have Larry DeNurita of William Blair. You may proceed.

Speaker 8

Hey, thanks. Good morning, everybody. Hey, a few questions. First, maybe address this, I don't think so, but $5,000,000 to $7,000,000 under absorbed overhead costs, that's up from I think $3,000,000 to $5,000,000 previously. What's driving Change that delta?

Speaker 3

Yes, it did change slightly. Certainly, there's been some timing changes from a customer launch A few of them we thought were going to start sooner rather than later. And so some of that's moved a little further into 2024. So we have a couple of large ones that are really set to launch in the back half of twenty twenty four, but even some of the smaller ones, unfortunately, the timing from the customer has in the line And that's why we've seen a little more drag on the P and L here in the coming quarter or 2.

Speaker 8

So does that present any kind of risk next year that we see continued push outs, especially the macro soft? Or How good do we feel about executing on, A, the run rate and B, remind us what the full year number should be that we should be modeling?

Speaker 3

We feel very good, yes. I mean,

Speaker 2

I think some of the

Speaker 3

things are just timing of some of the outsourcing, some of the moving from other It's just the timing of how they're managing their supply chain. And it's really been the impetus. And it's some design things certainly when they move product, they like to improve it and make other changes. I think a lot of that's behind us. So I feel confident that the launches now as we see them will come to fruition.

Speaker 3

We have said at the Investor Day that next year sales we think are between 50 And $60,000,000 And for the full year and really that's going to be more for that back half loaded. Again, we think we're going to we do believe we're going to exit 2024, when we think of that 4th quarter with a run rate of $100,000,000

Speaker 8

Great. So that leads me to this. Jack talked about growing in 2024, right? And getting that the big negative obviously is CV down 18%, but you can get that to flat. I believe you said flat CV revenue with the outsourcing, the new tank production, other wins, etcetera.

Speaker 8

So you can offset the negative with CV. But then are we taking CV flat from a high level next year CV is flat and then we're layering on the $50,000,000 to $60,000,000 Hazel Park on top of that? Or just Help us tie these numbers together so we can I know you don't have guidance, but there's a lot of numbers and a lot of deltas and we want to make sure things aren't overlapping?

Speaker 2

The 50 to 60 is in that number, Larry, that's not on top. The only thing I would say on top is really the lapping of the first half revenues of MSA.

Speaker 8

Okay. So CV and this Hazel Park, the 50 to 60 Hazel Park That we're using to offset the CV, but some portion of that's non CV also, right? So how much of the 50 to 60 is offsetting the CV declines and how much of the 50 to 60 Is non

Speaker 2

CV. We're not providing that level of detail At this point in the cycle, Larry, but we're happy to talk about our 2024 guidance when it's appropriate.

Speaker 8

Okay. Yes, it's just obviously, I think we're mixing some apples and oranges and we're all trying to get to some kind of fair number, but We're committing to growth in 2024 including MSA, including Hazel Park. CV is down 18% maybe according to one forecast, But it's offset by Hisle Park and some other things. And but either way, we're committing to some growth next year semi obviously that will

Speaker 2

blow up. So we also said Larry, let me clarify. We're expecting to grow overall MEC revenues Next year, outside of MSA addition.

Speaker 8

Outside of

Speaker 2

MSA lapping, right? That's happier MSA revenues coming into next year. Now in addition to that, we expect to grow at Mac revenues overall.

Speaker 8

Okay. Fair enough. And then we'll start with one last clarification. The $67,000,000 $6,000,000 $7,000,000 $1,000,000 to $2,000,000 EBITDA From the potential UAW issue, is that number specific to the one customer or that was a gross number prior to all these things, 3 getting sorted out?

Speaker 2

It's specific to one customer.

Speaker 8

Got you. Okay. Thank you very much.

Speaker 2

Because in October just to clarify, right, in October, We were able to manage most of our challenges with overall UAW strike. As you know, we have some exposure to auto In MSA and rest of today's solve is 1 CV customer. So October, I think we're able to manage quite well. November December, it's just specific to one customer in the CV6.

Speaker 8

Got it. Thank you. Good luck, guys.

Speaker 2

Thank you.

Operator

Thank you. As we have no further questions, I'd like to hand it back to Jag Waddi, President and CEO, for any closing remarks. We have a follow-up from Ted Jackson. Your line is now open.

Speaker 6

Hey, I just jumped in at the last minute with A couple of nitpicky questions for Todd because he's my favorite person to pick on. So one thing, just on SG and A, Todd, The quarter, the number was higher than was in my model. I mean, not a big deal. You've got MSA and there's clearly a lot of things moving parts inside the business. What would be on the other SG and A expense line, how should I think about that for the Q4?

Speaker 6

Just simply just kind of a reset, if you would, as I kind of think Through the model, I mean do you is there some one time stuff in there that we would see it go down or is that 8.6% kind of the new baseline and we should be building off of that?

Speaker 3

Keep in mind, the $86,000,000 includes $1,000,000 of legal fees related to our former fitness customer and that Continues to evolve. So I expect that to continue into the 4th quarter. And then $500,000 of transaction costs, which I don't expect That's kind of behind us. We incurred those costs in Q3. But I do expect to have ongoing legal fees unfortunately in the near term Until there's ultimate resolution on our claims.

Speaker 3

So we've said 4.5% to 5.5% in the near term. Next As we've talked about, we do have the SOX compliance requirements now that will no longer be considered an emerging growth company. So we're in a great position to do that, but certainly unfortunately, I'd rather audit fees and other related things go up. And from there, we'll continue to delever, De lever, I would say, as our sales continue to grow. So in the Q4, I would say it's similar without the transaction cost of the 500,000

Speaker 4

Okay.

Speaker 6

Okay. That's helpful. And then on my second question on the nitpick for you is on amortization of intangibles. I mean, I will you have an updated table for amortization in your QI, I assume? Just because clearly with MSA and everything and now that's in your balance sheet, that's all going to change.

Speaker 6

But in the interim, can you give me some kind of Color with what you think amortization of intangibles would be in the Q4 and then maybe in the aggregate for 2024?

Speaker 3

We're not at a point really this full. As you will see in our Q, which certainly it will be filed in the short term,

Speaker 2

You'll see the step up

Speaker 3

there is footnotes related directly to the acquisition. And I would just take that number and then continue it, right, and use that by quarter Into next year, I don't see most of those items that we are amortizing are 5% to 7%, in some cases a little longer to live. So it will be the same, very consistent for the near future.

Speaker 6

Okay. And will you file your Q at the end of today or when do you plan to put that in?

Speaker 3

The expectation is that we'll file it by the end of the day today.

Speaker 6

Okay. Hey, thanks very much. Take care.

Speaker 2

Yes. Thanks, Asad. Once again, thank you for joining our call. We appreciate your continued support of MEK 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 Valen, our Investor Relations Counsel.

Speaker 2

This concludes our call today. You may now disconnect.

Operator

Thank you. I can confirm today's conference call has now concluded. Sir, you may now disconnect your line.

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Earnings Conference Call
Mayville Engineering Q3 2023
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