Welcome, everyone, to the Mayville Engineering Company's Third Quarter Earnings Call. My name is Victoria, and I'll be conducting our call today. I will now hand over to your host, Nathan Elwell, Investor Relations, to begin. Nathan, please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on today's call. A few quick items before we begin. First, please note that some of the information that you will hear during this call will consist of forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 as amended. Such statements express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks, assumptions and uncertainties, our actual results could differ materially from those in the forward-looking statements. More information regarding such risks and uncertainties, please see our filings with the SEC, including our filings on Form 10-K for the period ended December 31, 2020. We assume no obligation and do not intend to update any such forward-looking statements, except as required by Federal Securities laws. Second, this call will involve a discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at mecinc.com. Joining me on the call today is Bob Kamphuis, Chairman, President and Chief Executive Officer; Todd Butz, CFO; and Ryan Raber, EVP of Strategy, Sales & Marketing. First, Bob will provide an overview of our performance, then Todd will review our financial results and guidance. With that, I'll hand the call over to Bob. Please go ahead.

Thank you, Nathan. Good morning, everyone. Sitting here today, MEC's headlines are continued strong medium and long-term demand trends across the end markets we serve, plus increased interest in our services from a broadening range of companies. However, our company's supply chain constraints have resulted in near-term volume deferments. For the third quarter, we produced net sales of $109 million, approximately half of the $17.9 million improvement over last year was driven by material price pass-throughs to customers, with the remaining increase attributable to improved demand. We delivered EBITDA of $10 million, which rose an operating income of $864,000. Despite the macroeconomic challenges we are now facing in 2021, we have once again outperformed on almost every metric on a year-over-year basis. For example, manufacturing margins were $10.9 million, which increased $1.2 million over last year due to a higher volume of production and higher scrap income, partially offset by inflationary pressures. Across the board, the demand trends continue to be very positive. However, our short-term volumes were impacted this quarter as supply chain disruption became more of a problem for some of our customers. This is a temporary situation, and there are two pieces of good news for MEC. First, these volumes have only been deferred, and we expect to work through the situation with our customers as their supply chains adapt in the coming quarters. Second, MEC's owned supply chain is 99% concentrated in the U.S., and we have been able to maintain our supply of raw materials and components with only minor disruption, albeit at higher prices. That means we remain ready when our customers are able to ramp up their volumes again. Our performance has been affected by the dramatic production changes in September at Class 8 truck OEMs, which led to rapid volume deferments for MEC, plus the general inflationary pressures on labor and raw materials, which we expect to recover through increased pricing and contractual material price pass-throughs. As we manage through these third-quarter challenges, it was important that we maintained our skilled workforce so that we are in a position to address the forecasted strong customer demand when supply chain issues are resolved. Recruiting quality employees remains a challenge, although our continued investment in flexible redeployable automation and process improvements is allowing us to cost-effectively grow our capacity. It is worth noting that while we have learned to operate effectively during the pandemic and COVID cases are not problematic in the communities we operate in, the health and safety of our workforce remains a top priority, and we are continually reinforcing all safety measures and operating within CDC and state guidelines. As I already mentioned, the end markets we focus on today continue to forecast a positive outlook. For instance, the commercial vehicles market continues to have strong market demand, and in the short-term has been probably the most impacted by supply chain issues at our customers. With a strong backlog and continued strong freight demand, we believe this market will remain positive over the medium to long term. Power sports remained strong, with demand for outdoor recreation-oriented products remaining at elevated levels. We anticipate that retail demand will continue to be strong, and our customers will continue to rebuild their dealer inventories in the coming quarters to meet that demand and better serve their customers. The construction and access end markets have continued to show improvement in residential construction, particularly for equipment that is tied to housing and equipment rental. While non-residential, oil and gas have not seen significant recovery yet, we think these areas are starting to show signs of improvement, with lower dealer inventories and rising oil prices, which we believe will continue. We remain optimistic regarding agriculture due to the improving crop prices, low crop inventories, and low equipment inventory. We anticipate that this area will continue to see improving volumes in the near to midterm. Concluding our comments with our military segment, it continues to be a stable market for us, with customers having a solid backlog for U.S. government contracts. We continue to see potential for increased revenues due to vehicle updates that are being implemented by our customers. While demand continues to be strong, the supply-side headwinds at our customers continue to hinder our growth. Similar to the rest of the economy, supply chain disruption is impacting our customers, which, in turn, negatively impacts our production volumes. In addition, as you may have seen in the news, one of our top customers is experiencing ongoing labor issues with their union, which began in October. We are working with this customer and for this customer to do whatever we can to help. However, we do expect this to disrupt our near-term production schedules. One of our biggest priorities is maintaining and expanding our base of skilled employees to help us address our growth potential. We expect in most of our locations, finding the right people will continue to be a challenge for the foreseeable future. Our HR team is using a variety of creative recruiting strategies and initiatives, while we, as a company, continue our investments in flexible and redeployable automation and technology. I am pleased to report that production preparation in Hazel Park, Michigan for our leading U.S.-based fitness customer is progressing well. This 450,000 square foot facility gives us the floor space and capacity in the right employment market, so we have decided to add a second phase of capacity at the same location to support overall demand trends for other customers. We continue to expect the initial phase of capacity to be ready during the first half of 2022 and the new second phase to be ready in the second half of 2022. During the third quarter, we invested approximately $6.5 million of CapEx in the new facility and expect to invest $35 million to $40 million just in Hazel Park during 2021. The market diversification will be evident in our full-year 2022 results, and we expect to see more of these types of product localization opportunities in the years ahead. In addition, our new business pipeline remains strong. We have continued to build relationships and convert on new opportunities to expand our customer base in the markets we serve. I'll walk through some of the interesting opportunities we see today. The power sports market continues to be a very active space for us with continued market share growth on new programs with existing customers that are planning to start production next year, plus new and takeover programs with new customers that we began working with this year. We have been continuing to expand our market share on the next generation of tactical wheeled vehicles for the military that will increase our revenues over the course of the next couple of years. In addition to current programs, we have seen increased activity and service order demand and further market share penetration and expansion that will bolster revenues over the coming quarters. The commercial vehicle market has new model releases, which will lead to continued market share gains for us. We expect this to continue as customers work on their next-generation products, which will allow us to drive organic revenue growth. In the agriculture market, we continue to see our customers expand their product offerings, which has allowed us to gain additional volume across our current product offerings. Overall, the new business pipeline remains robust with numerous projects being actively pursued. We're excited about all of the avenues of growth with current and potential customers, and we'll keep you updated on the latest developments over the coming quarters. Our new business pipeline remains strong, and we'll be pursuing these opportunities, both at existing and new customers. We look forward to providing these updates. There have been no major changes in our capital allocation priorities since last quarter. However, given the fact that our balance sheet is strong with a current leverage ratio of 1.2x, we have received the authorization from the Board to extend our share repurchase program, which was due to expire at the end of the year. We can now repurchase up to $25 million in shares through the end of 2023. Of course, we also have access to sufficient capital to make important investments to support long-term growth and consider external investment opportunities. On that point, we continue to see a good pipeline of M&A opportunities and remain focused on analyzing potential targets that could open new markets, develop new relationships with new potential blue-chip customers and possibly add new geographies. Above all else, be certain that strategic fit and rational valuation are the top considerations when considering opportunities, and we continue to review and pursue logical potential deals. Our recent performance and current outlook on the business remains very positive as we address the supply-related challenges and manage the strong demand trends that we are seeing in virtually all of our end markets. These trends are set to continue for the remainder of this year and for the foreseeable future. I'd now like to turn the call to Todd to discuss our financial results in more detail. Todd?

Thanks, Bob. I'll begin with a look at our third quarter financial performance before providing commentary on our balance sheet, liquidity, and thoughts on guidance. As we noted in our press release, we recorded third quarter net sales of $109 million as compared to $91.1 million for the same prior year period. The approximate 20% increase was primarily driven by contractual raw material price pass-throughs to customers in the current period and market demand increases following the pandemic that caused customer shutdowns during the prior year period. Manufacturing margins were $10.9 million for the third quarter of 2021, as compared to $9.7 million for the same prior year period, an increase of approximately 12%. The increase was driven by higher production volumes and scrap income resulting from improved market pricing for scrap material in the current period. These improvements were slightly offset by inflationary pressures on wages, benefits, materials, and general manufacturing supplies. The company also incurred approximately $800,000 in launch costs related to the new Hazel Park, Michigan facility during the third quarter. Overall, we expect to incur between $3.7 million to $4.3 million in launch costs this year. In addition, the prior year period included $687,000 of restructuring costs charged to cost of sales related to the Greenwood facility closure, which was completed in the third quarter of 2020. Manufacturing margin percentages were 10% for the third quarter of 2021 as compared to 10.7% for the same prior year period, a decrease of 70 basis points. The decline was due to the $8.4 million impact of material price pass-throughs that increased sales but do not increase margins. $2.7 million associated with contractual material pricing lag, $800,000 of launch costs associated with the new Hazel Park, Michigan facility, and $400,000 of other inflationary cost pressures. When the impact of these are removed, our incremental margin percentage would have been 22.7%, which is right in line with our historical average of 22.5%. Profit sharing bonus and deferred compensation expenses were $1.9 million for the third quarter of 2021 as compared to $2.3 million for the same prior year period. The decrease was driven primarily by last year's acceleration of the accrual amounts as we reestablished discretionary bonuses and 401(k) related accrual as business activity in the prior year period began to accrue post-COVID-19 related shutdowns. Other selling, general and administrative expenses were $5.3 million for the third quarter of 2021 as compared to $4.5 million for the same prior year period. These expenses increased by $850,000 due to higher salary, payroll, travel and entertainment expenses, which were artificially low in the prior year period due to the COVID-19 pandemic. For the third quarter of 2021, income tax expense was approximately $100,000 on pretax income of $300,000. Our federal net operating loss carryforward was approximately $12 million as of quarter end, which was driven by pretax losses incurred in prior years. The NOL does not expire and will be used to offset future pretax earnings. We continue to anticipate our long-term effective tax rate to be approximately 26% based on current tax regulations. Adjusted EBITDA was $10 million for the third quarter of 2021 as compared to $9.8 million for the same prior year period. Adjusted EBITDA margin percent decreased by 160 basis points to 9.2% in the quarter as compared to 10.8% for the same prior year period and represents an incremental margin of only 0.9%. Our adjusted EBITDA margin and margin percentages were impacted by increased sales, offset by raw material price pass-through to customers and inflationary pressures on wages, benefits, materials, and general manufacturing supplies during the current period. Again, if we remove the aforementioned short-term inflationary costs, our incremental margin would have aligned with our historical averages of 22.5%. Now let me address our capital expenditures, balance sheet and liquidity figures. Overall, capital expenditures for 2021 are expected to be in the range of $52 million to $57 million, with $35 million to $40 million specifically focused on investments in the new Hazel Park, Michigan facility. Capital expenditures of $9.6 million for the third quarter of 2021 were in line with our 2021 budget and focused on our continuing investment in Hazel Park, which accounted for $6.5 million, with the remainder being for the continued investment in new technologies and automation of our base business. We have invested $26.6 million year-to-date as compared to $5.4 million for the same prior year period. The increase is primarily due to the prior year period being artificially low as we conserve cash during the height of the pandemic and our current year investments in Hazel Park. As of the end of the third quarter of 2021, total outstanding debt, which includes bank debt and capital lease obligations, was $56.9 million as compared to $62.8 million at the end of the third quarter of 2020. The nearly $6 million debt decrease is due to continued positive operational cash flows, which resulted in our leverage ratio dropping to 1.2x based upon a trailing 12-month adjusted EBITDA of $46.4 million. The current year leverage ratio was substantially lower than the 2.2x for the third quarter of 2020 and significantly lower than our covenant threshold of 3.5x. Now, I'd like to discuss 2021 guidance. Based on the recent challenges related to OEM supply chain issues impacting short-term volumes, the overall economic climate, the broader industry and market trends, we are modifying our 2021 financial outlook back to our original projections. Sales are expected to be between $450 million to $470 million, down from the prior range of $470 million to $490 million. We are also guiding projected adjusted EBITDA to the lower end of our range of between $46 million and $52 million, net of launch costs associated with the new customer relationship of $3.7 million to $4.3 million. With that said, please remember that our outlook assumes our end markets remain stable, supply chain constraints do not dramatically worsen, and that business activity as a whole continues to trend positive.

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

Our first question comes from Mig Dobre from Baird & Co.

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

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

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

This is Ryan. In the third quarter, we saw more severe shutdown activity, especially in the commercial vehicle sector. As they address the supply chain challenges, we anticipate more days of production scheduled for the fourth quarter. Overall, our end markets remain strong. The power sports, construction, access, and agriculture sectors are performing well, though we are monitoring labor issues with a specific customer to assess any potential impact. Generally, we expect volumes to continue increasing into next year, with the main consideration being when our customers will be able to ramp up their volumes to meet demand as they navigate through the supply chain challenges.

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

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

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

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

Our next question comes from Vlad Bystricky from Citigroup.

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

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

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

Within our operations, I can't comment on our other customers as they are working closely with their teams. There are positive developments in the marketplace, and they will manage those as we have. Overall, I believe our company is in a good position. The limited availability of skilled workers is being addressed by increasing our investments in technology and automation, which will enhance our output.

There are several moving pieces as we consider 2022. I understand you aren't providing guidance for that year just yet, but given the cost pressures we've experienced, the timing lag associated with pricing adjustments, and the ramp-up of the facility in Michigan that you're developing, could you share your thoughts on the potential for EBITDA margin expansion in 2022? Additionally, what is your perspective on the longer-term goal of returning to a 15% margin?

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

And Vlad, this is Todd. I would like to add that when reviewing the third quarter results, which showed around 9% adjusted EBITDA, it's important to consider all factors, including the launch costs, the impact of material price fluctuations, the timing of pricing adjustments, and various inflationary costs. We have mechanisms in place to recover these costs in the upcoming quarters. When the markets stabilize, we've observed that our adjusted EBITDA for the third quarter is closer to 14%. With expected volume increases returning to pre-pandemic levels, we can reasonably assume that our EBITDA could rise from 14% to 15%, leveraging our fixed overhead. Overall, we feel very confident about our position. We've implemented strategies such as new technologies, automation, plant consolidations over the past 18 months, the launch of the Hazel Park facility, and our pricing strategy. Therefore, we're aligned around the goal of achieving 15%, and we just need to reclaim pre-pandemic volume levels.

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

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

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

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

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

Okay. Regarding the Deere strike, we need to assess the impact on order markets. Are we still receiving and fulfilling orders, or is there a shift happening? I am interested in how we can adjust our operations to slow down and then increase production once this situation is resolved. Additionally, I'm curious about the timing of this and whether we anticipate any slowdown in the fourth quarter. Are we observing that yet, or is it more of a future expectation?

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

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

No, it would be in North America, certainly.

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

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

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