Good morning. Thank you for joining the Mayville Engineering Company Second Quarter 2024 Earnings Conference Call. My name is Tamiya, and I will be your moderator today. All lines will be muted during the presentation, with a chance for questions and answers at the end. I will now pass the conference to your host, Stefan Neely with Vallum Advisors. You may proceed.

Thank you, Operator. On behalf of our entire team, I’d like to welcome you to the Mayville Engineering second quarter 2024 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 uncertainty, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliations of these measures to the closest GAAP financial measure is included in our quarterly earnings 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 good morning, everyone. Thank you for joining us today. During the second quarter, we continued to demonstrate strong strategic execution, which drove robust net sales growth, margin expansion, and free cash flow conversion. During the quarter, our team successfully executed on new project startups in our commercial vehicle and powersports end markets. These new projects drove nearly 7% year-over-year organic sales growth, well above the growth trends in our end markets. Our team’s continued focus on implementing our MBX lean initiatives drove $0.9 million of year-over-year self-help adjusted EBITDA improvements during the second quarter. Since the beginning of the year, our structured approach to operational excellence and lean manufacturing has resulted in approximately $2.5 million of sustainable year-over-year margin improvement. As we move into the second half of the year, our team’s continued successful execution on key commercial growth and operational excellence initiatives, combined with improving utilization at our Hazel Park facility, will be important catalysts for outperforming our end markets. While customer demand remains steady throughout the first half of the year, our customers’ outlook for the second half of the year has softened in a few of our key end markets. However, with our robust strategic execution combined with our market share gains, we continue to expect that we will deliver growth for 2024. With that in mind, we are reiterating our 2024 financial guidance for net sales and adjusted EBITDA, which projects full year net sales growth of between 5% and 9%, and growth in adjusted EBITDA of between 9% and 15%. As it relates to free cash flow, our strong performance in the first half of the year has outpaced our expectations. As a result, we are increasing our expected full-year 2024 total free cash flow guidance to between $45 million and $55 million. Turning now to a review of market conditions across our primary end markets. Let’s begin with our commercial vehicle market, which represents approximately 37% of our trailing 12-month revenues. During the second quarter, commercial vehicle revenue increased by 10.8% on a year-over-year basis. This is primarily due to strong strategic execution on new project launches and strategic pricing initiatives, which more than offset a 0.3% decrease in North American Class 8 production during the quarter. Currently, ACT Research forecasts that Class 8 vehicle production will decrease 9.4% year-over-year in 2024 to approximately 308,000 units. ACT expects build rates to soften materially in the second half of the year, declining 17% in Q3 and 23% in the fourth quarter. For MEC, we expect our new CV project launches to continue ramping into the second half of the year, which will help us maintain comparable sales to this end market relative to 2023. It is also worth highlighting that ACT currently expects Class 8 production to recover in 2025, growing 1% compared to 2024 and having continued growth of 11% from 2025 to 2026, which supports our organic growth expectations for the next two years. Next is the construction and access market, which represented approximately 17% of our trailing 12-month revenues. Construction and access revenue increased 2.7% on a year-over-year basis in the second quarter. This reflects the steady demand in non-residential and public infrastructure markets, which more than offset softness within residential markets. We expect this trend to continue through 2024, supporting our overall outlook for flat net sales to this end market due to infrastructure-related equipment demand and ongoing new customer wins. The powersports market represented approximately 18% of our trailing 12-month revenues and increased by 26.3% on a year-over-year basis in the second quarter. We continue to benefit from market share gains, which include new customer programs on high-end models and were modestly offset by softening consumer discretionary demand. As we have stated in the past, we believe that our growth rate in this end market will slow relative to the prior year comparisons, but the momentum from our market share gains in this end market will continue to drive growth for the year. Our agricultural market represented approximately 9% of trailing 12-month revenues and increased 8.9% on a year-over-year basis during the second quarter. Our second quarter results for this end market reflect contributions from the MSA acquisition offset by softening demand within our legacy large ag market. The outlook for ag has been increasingly uncertain due to the impact of lower crop prices and elevated inventory levels. Given this uncertainty, we expect our markets to be soft in the second half of the year but still outperform the overall ag market due to market share gains with key customers. Overall, our second quarter net sales growth included nearly 11% growth associated with the Mid-States Aluminum acquisition, which closed early in the third quarter of last year. The majority of MSA revenues are represented in our other end market. For 2024 as a whole, we continue to see MSA generating between $20 million to $30 million of incremental net sales. On the commercial front, we continue to build our momentum, cross-selling MSA’s capabilities to our existing customers. We expect that these efforts will be significant catalysts for above market growth in 2025. On the pricing front, our team’s efforts continue to bear fruit, particularly as new project volumes ramp up. During the second quarter, our commercial pricing initiatives drove $0.6 million in incremental adjusted EBITDA year-over-year net of inflationary pressures. We continue to target between $1 million and $2 million of adjusted EBITDA growth from our pricing initiatives through the end of the year. Turning now to an overview of substantial new business wins during the second quarter. We have continued to gain additional market share with our commercial vehicle customers as they plan their vehicle updates going into the emissions regulation changes. We expect to continue to grow share over the next two years with the amount of change that is expected to occur. During the second quarter, we continue to expand share with one of our new powersports customers supporting their next-generation product lines. These wins support additional growth over the next year and expect additional organic opportunities in the quarters ahead. In the quarter, we expanded share within our primary military customer, expanding share on current product, bringing us additional diversification across platforms. During the quarter, we received multiple awards for engine tube products in the agriculture market, driven by model updates based upon regulatory emissions changes that will be occurring in the years ahead. We also grew share with one of our industrial customers supporting material handling equipment in the quarter as they look to launch new products into the market. As part of our ongoing strategic success, our operations team has continued to build momentum with the execution of our MBX framework and the culture of continuous improvement that has begun to permeate the company. These initiatives have been driven by our rigorous approach to MBX lean implementation, highlighted by over 200 MBX kaizen events since launching the MBX program in late 2022. In summary, the execution of our commercial and operational excellence initiatives has been quite successful as represented by our financial performance thus far in 2024. These results give us further confidence in our ability to drive rateable improvements to our financial profile and deliver sustainable long-term shareholder value. As you will recall, we expect to deliver between $750 million and $850 million in revenue, expand adjusted EBITDA margin to between 14% and 16%, and generate free cash flow of between $65 million and $75 million by the end of 2026. Given our strong strategic execution, it is evident that we are making meaningful progress toward achieving these goals. In terms of capital allocation, our strong free cash flow generation has allowed us to reduce our net leverage by nearly 1 turn over the course of the last year. At the end of the quarter, our net leverage ratio stood at slightly below 1.7 times. Given the strong year-to-date cash flow generation, we now expect to be at the lower end of our targeted net leverage ratio range of between 1.5 times and 2 times by the end of 2024. Additionally, during the second quarter, we repurchased $1 million worth of common equity under our $25 million share repurchase program, with $24 million remaining under the existing authorization. Going forward into the second half of the year, we intend to repay additional debt in order to further reduce our cost of capital. Additionally, we are also actively evaluating a more structured approach to our share repurchase strategy, which aligns with our existing authorization. Strategic M&A has always been a key part of our multiyear growth and business transformation strategy. Our top priorities include lightweight materials fabrication and complementary bolt-on acquisitions of creative assets. As we have been making solid progress towards our leverage goal, we are increasing our focus on evaluating key opportunities to build on our market-leading capabilities and further position the company to capitalize on multiyear secular growth trends in energy transition and OEM outsourcing. Ultimately, we are taking a philosophical approach to capital allocation that is centered on deploying capital in a manner that creates the greatest return for the company and for our shareholders. We believe the highest opportunities for return are through debt reduction, strategic M&A, and share repurchases, and will continue to allocate our capital prudently based on these opportunities. In summary, I am very proud of our team’s ongoing commitment to excellence and strategic execution. Their hard work and commitment have positioned us to navigate the impending softening of end market demand and deliver above-market growth with sustainable value creation, both in the near-term and over the coming years. With that, I will now turn the call over to Todd to review our financial results.

Thank you, Jag. I’ll begin my prepared remarks with an overview of our second quarter financial performance, followed by an update on our balance sheet and liquidity. Total sales for the second quarter increased 17.7% on a year-over-year basis to $163.6 million. This increase was driven by a combination of the MSA acquisition, strong strategic execution, and continued organic sales growth, partly offset by ongoing softness in our legacy agricultural end market and the expected roll-off of certain military aftermarket programs at the end of 2023. When excluding the MSA acquisition, organic net sales growth was 6.9% on a year-over-year basis. Our manufacturing margin was $22.3 million in the second quarter, as compared to $15.1 million in the same prior year period. The increase was primarily driven by organic volume growth, execution of our MBX lean manufacturing initiative, commercial pricing, and the acquisition of MSA. Our manufacturing margin rate was 13.6% for the second quarter of 2024, as compared to 11.6% for the prior year period, for an increase of 200 basis points. Other selling, general, and administrative expenses were $8.3 million for the second quarter of 2024, as compared to $7.4 million for the same prior year period. The increase was primarily driven by an additional $500,000 of legal expenses relating to our former fitness customer, incremental expense associated with MSA, and increased costs related to compliance requirements. Interest expense was $3 million for the second quarter of 2024, as compared to $2 million in the prior year period due to higher borrowings under our credit facility. The increase in borrowings is due to the acquisition of MSA, which closed on July 1, 2023. Our focus on reducing our debt leverage, combined with strong free cash flow through the second quarter of 2024, has allowed us to achieve our net leverage goal of between 1.5 times and 2 times, which is ahead of our year-end target. Going into the second half of the year, we will continue to repay debt in order to reduce our interest expense, which is bearable based on net leverage. Adjusted EBITDA increased to $19.6 million versus $15.3 million for the same prior year period. Adjusted EBITDA margin increased by 100 basis points to 12% in the current quarter, as compared to 11% for the same prior year period. The increase in our adjusted EBITDA margin was primarily due to the increased organic volume, the MSA acquisition, MBX initiative, and the benefit from our commercial pricing activities. Our second quarter results demonstrate the continued progress towards our 2026 adjusted EBITDA margin goal of 14% to 16%. Turning now to our statement of cash flows and balance sheets. Free cash flows during the second quarter of 2024 was a positive $19.2 million or $0.94 per share, as compared to a negative $3.7 million in the prior year period. The improvement in free cash flow year-over-year was due to improved working capital efficiency resulting from our MBX initiative and a one-time $17.6 million payment of deferred compensation expense in the second quarter of last year. Our strategic execution has been the primary driver of our improved free cash flow conversion thus far in 2024. As a result of our MBX lean initiative, our day sales outstanding and inventory days have both declined by more than 15% as compared to a year ago. As of the end of the second quarter of 2024, our net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents, was $125.1 million, as compared to $89.7 million at the end of the second quarter of 2023. Our debt reduction resulted in a net leverage ratio of slightly below 1.7 times as of June 30th and will provide for a 30-basis-point rate reduction in the third quarter. In light of our second quarter results and our current outlook for the remainder of the year, we are reiterating our financial guidance for net sales and adjusted EBITDA, while increasing our financial guidance for free cash flows. For 2024, we continue to expect the following, net sales of between $620 million and $640 million and adjusted EBITDA of between $72 million and $76 million. For free cash flows, we now expect full-year free cash flow to be in a range between $45 million and $55 million, as compared to our original expectations of between $35 million and $45 million. Our outlook for the whole year continues to reflect a risk-adjusted view of overall demand for the second half of the year. During the first half of the year, we have experienced strong growth and margin realization due to our strategic execution. However, as Jag had mentioned, we have seen softening demand in some of our end markets, particularly commercial vehicles, powersports, and agriculture. These end market dynamics are in line with the risk-adjusted view of the year, even as our growth and execution during the first two quarters outpaced our expectations. Overall, when combined with evolving end market dynamics, our guidance continues to reflect organic net sales growth, as compared to 2023, of between 1.5% and 2.5% due to new product wins. With that, Operator, that concludes our prepared remarks. Please open the line for questions as we begin our question-and-answer session.

The first question will be from Mig Dobre with Baird. You may proceed.

Thank you. Good morning, everyone, and congratulations to the team on a really good performance in a choppy environment. So that’s great to see. I guess my first question is on the free cash flow guidance, and Todd, maybe you can help me better understand what prompted you to raise that guidance, even though the other elements have stayed unchanged. Is this just a function of kind of converting some of that inventory into cash? Are there any other important capital items for you to be aware of?

Good morning, Mig. I’m going to quickly pass on to Todd here, but I just want to reiterate that our sustained efforts in continuing to drive MBX across our enterprise, that’s in both operations and the rest of the functions, and driving better days in payables, better days in receivables, inventory reduction, better forecasting, SIOP implementation, all of these actions that we’ve been pursuing for the last year and a half has shown in the first half what the power of MBX is and that is really what gives us the confidence to raise our guidance for the year.

Yeah. Good morning. To Jag’s point, it really is driven by the MBX initiatives. I mean, if you look back 12 months, 18 months ago, we were at six times or terms, rather. Today, we’re at just over nine as we finish the second quarter. In addition to that, we’ve been working very hard on our terms and conditions with customers, our collection efforts. I mean, across the board, it’s been very, very positive. So, when we looked into the back half of the year, which historically, Q4 is one of our strongest cash flow quarters, we do expect now that, again, being that range of $45 million to $55 million, and that’s why we feel confident that we can achieve that, and therefore, we raised the guidance.

But, again, looking back historically here, I think in 2021, we had a big cash drag from an inventory build. I’m kind of searching through my memory here. I think that might have had something to do with challenging supply chain and all the disruptions that existed in the industry at the time. I guess my real question here is, is there room to improve on the performance that you’re delivering this year? Should we expect another, you name it, $5 million, $10 million worth of potential release of working capital as we go forward?

So, when you think of 2021, it was supply chain. We were also building inventory for the expected launch of our former fitness customers. So, a bit of a unique situation there.

Right.

As we move forward, definitely this year, we do expect to unlock continued working capital, whether it be through receivables, payables, our payments, as well as inventory. But I will note that that rate of progression will moderate a bit when you think of going from six times or six terms rather than nine. There’s a lot of, let’s say, low-hanging fruit that we get after going from nine to ten or ten to eleven is a little more difficult. Now, we still remain confident we can achieve that, but it’ll take a little more time to do it. But in the near term, we do expect in the next six months that we’ll continue to see good working capital progression and favorable free cash flow.

Okay. Okay. Two questions on end markets. I guess the first one is on commercial vehicle. In your prepared remarks, Jag, you talked about the setup here into the third quarter and the fourth quarter. But as I understood it, you said that you still expect to be flat year-over-year from a revenue standpoint in commercial vehicle. I’m curious as to what gives you the confidence that you’re going to be able to hit that guide and I understand that you outperform relative to build by about double digits in Q2. But the degree of outperformance, especially as we look into Q4 relative to build would be much more significant than what you’ve done thus far. So is it that these customers are ramping through the year, these new contracts are ramping through the year, or is there something else to be aware of here?

Yeah. On commercial vehicles, the first half, our customer builds outperformed our expectations. And we do expect the second half to slow down, our customers to slow down their build rates, and that’s what we have planned from the beginning. Our confidence in hitting our forecast for the second half really relies on our customers’ build rate projections and ACT forecasts of 308,000 vehicles for the year. Given that, even though we do expect some softness in the deceleration of build rates, given our new program launches and some of the share gains we’ve been talking about, those increased sales to our end customers give us confidence that we can hit our forecasted targets.

But to be clear here, you expect to be flat revenue in commercial vehicles even in the fourth quarter on a 23% build decline?

Let me reiterate, we expect to be flat for the full year in 2024 to 2023 results in our CV market.

Okay. Thank you for clarifying. And then finally, on agriculture, you already mentioned that large agriculture is under pressure. I think small ag is under pressure as well. There’s…

Yeah.

... pretty material production costs that are coming across from older OEMs, somewhere in the high 20s, low 30s in some cases. So I’m sort of curious here as to how you think about this vertical specifically, especially as you differentiate between Q3 and Q4, because the pressure on build rates seems to be varying between these two quarters by OEMs. So based on your customers, I’m kind of curious as to how you think about progression here. Thank you.

We anticipate that the overall agricultural market will decline by about 15% for large ag and roughly 10% for small ag. For our company, we expect a decline of around 5% for the year, mainly due to some share gains we've achieved and a comparison to some agricultural revenues from the first half of the year. Year over year, we will experience a decline of approximately 5% in the ag end market. However, it's important to note that agriculture constitutes only about 9% to 10% of our total sales, making it one of our smaller markets, slightly larger than our military market, which is about 6%. Despite the concerning headlines and public comments from our customers, we believe that due to where we are in the cycle, our program wins, and our share gains, we can continue to outperform in the agricultural end market.

I appreciate it. If I can squeeze one more, I’m sorry. On the military, just as a quick reminder here, is your exposure in military predominantly on the JLTV or are there other programs that you have in there as well? Thank you.

Yeah. So we have JLTV, FMTV are the two main programs we’re on.

Great. Thank you. Good luck.

Thank you.

Thank you. The next question comes from Ted Jackson with Northland Securities. You may proceed.

Thank you very much.

Good morning.

Congrats on the quarter, guys.

Okay.

I have a few questions, and I'll go through them quickly. First, regarding the commercial vehicle, I heard you mention an 11% growth forecast for 2026, but I didn't catch what you projected for 2025. Do you happen to have that information?

Yeah. We expect 2025 to be approximately 1% up versus 2024.

Okay. And then when I think about that, I mean, that’s market data, you would expect at a minimum to grow in line with market. So I’m not saying that that’s your guidance. I’m just saying like, if the market data and the projections hold true, that it would stand to reason that you would expect to see some modest growth in commercial vehicle in 2025.

Yeah. Obviously, we’re not providing any guidance for 2025. With that caveat, we expect to outperform the commercial vehicle market in 2025.

My second question focuses on the powersports market. You've really excelled there. The market is as weak as it can be, but your project wins are helping you navigate through that. Looking at the end of this year and heading into 2025, are there additional factors that might allow you to continue outperforming the market? I'm not asking for specific details about market share or growth, but do you see 2025 as a year where you’ll grow in line with the market, or do you think the momentum from the new activities initiated in 2024 will carry over into 2025, enabling you to continue growing faster than the overall market?

Let me first step back… Yeah. So the discretionary nature of significant spend in the market and interest rates have had an effect on customer purchases. At the same time, our customers have built up significant inventory in the channels as well. It’s been a really great first half for us in powersports market as we ramp up new customers. We do expect the second half to moderate a bit our growth rates in the market. We will still grow and outperform the market. It’ll be interesting to see what happens with interest rates and channel inventories with our customers as we go into 2025. There is a good possibility that we will outperform the market even in powersports next year. But sitting here, it’s a little challenging to predict, right, how that is all going to play out given the interest rate environment we’re currently in.

I listened to all those calls and while the new product initiatives they discuss are appealing, the market itself is quite challenging. Jag, I have a question that might resonate with you and could be a bit engaging. I’d like you to elaborate on your progress with value-based pricing. You have emphasized how it is enhancing your margin structure. Regarding MEC and its revenue base, how much of your revenue have you shifted to this new pricing model? Additionally, how far do you think you can expand it, and what is your outlook for its trajectory as we move into 2025 and beyond?

As we indicated last time, Ted, probably 15%, maybe less than 20% of our total sales are probably under the quote-unquote new pricing regime, i.e., value-based pricing. So what that gives us is a good three-year to four-year to five-year runway to continue to convert existing core business to the new pricing model. So it’s going to have some legs at the same time, right? It’s going to take some time as well, and it’s both positive as well, given that we can continue to leverage our pricing for the foreseeable future.

Okay. My last question for you all is just maybe an update on the sports equipment litigation kind of where are you with regards to that process? Maybe any change in terms of how you see it in terms of its resolution? Just kind of an update on that front. Thanks.

Sure. The discovery process continues with the litigation, and we expect the discovery phase to conclude in Q3, and anticipate potentially a trial to begin either later this year or early 2025. We remain confident in a positive outcome for MEC. Beyond that, we will not comment on the pending litigation.

Okay. Great. It was worth asking. Congrats again on the quarter. I’ll talk to you guys soon.

Thank you, Ted.

Thanks, Ted.

Thank you. The next comes from Ross Sparenbleck with William Blair. Your line is open.

Good morning, Ross.

Good morning, Ross.

All right. You can hear me. Apologies for technical difficulties there. Maybe sticking on the margins, as we think about kind of the second half, maybe a little bit softer on the end market, but you have done excellent work with MBX. What would expectations be for maybe decrementals, given the work that has been done, if it’s maybe a little bit worse than expected in the second half of the year?

No, I wouldn’t describe the decremental as significantly different. Historically, our decremental is around 17.5%, and I would say we are currently at or slightly below that. I expect to continue seeing the positive effects of MBX, commercial pricing, and other initiatives in the second half. However, this will be somewhat offset by the challenges posed by underutilization at a few of our larger facilities. Overall, I anticipate margin improvement in Q3 and Q4, but at a slower rate compared to the increase we experienced from Q2 to Q3.

Just to add to that, Ross, we are actively looking at all the levers we have at our disposal as we expect the volumes to come down, particularly in some large facilities and significant operations. We’re looking at every lever, including cutting back on overtime, really following strict checkbook processes to make sure that our variable spend is down. We’re looking at resizing our workforce in a couple of our facilities that are either seeing or expected to see some significant volume reduction. So, we’re taking all the actions necessary for the second half for us to continue to drive the revenue and margin progression as we laid out.

Okay. And maybe just on capacity, when we think about access, I think maybe there’s $10 million left to go get at Hazel Park. But just company as a whole, where do you guys stand today and how should we frame all the wins in the second quarter, as you know, contributing in the next four quarters to revenue, trying to support that?

Yeah. So, the first point I would add is, we’re continuing to make good progress with the ramp up of Hazel Park. That gap that you highlighted, we continue to work that gap down. The pipeline that our sales team has developed is really strong, and we are continuing to focus on closing those opportunities to be able to add to that gap that you mentioned. So, sitting here, we feel pretty good about our exit rate out of Hazel Park in 2024.

Perfect. And just one more, if I can, on Hazel Park. Is there anything that we should call out in the modeling as we think about the cadence of these four end markets ramping? Powersports is obviously having a good year this year. Is ag maybe at 2025, 2026, or is there anything, with that cadence that we should be aware of?

I wish I could predict the downturn in the agricultural market or how long it will last. We will need to monitor it closely, and by the end of the year, we should have a clearer picture of where interest rates, yields, and crop prices stand. However, it's important to remember that agriculture makes up only 9% of our overall business. While the news may be quite negative, it is still a relatively small part of our overall operations.

Okay. So, the ramping of these programs isn’t fully insulated from the overall market is the takeaway, whereas powersports, it clearly is.

Yep. Agreed.

Oh! Perfect. Awesome, guys. Well, yeah, congrats on the quarter. Thanks for the questions.

Thanks, Ross.

Thanks, Ross.

Thank you. There are currently no other questions at this time. I will pass it back over to the management team for closing remarks.

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

This concludes the conference call. Thank you for your participation. You may now disconnect your line.