Mayville Engineering Company, Inc. Q1 FY2025 Earnings Call

Hello, everyone, and thank you for joining the Mayville Engineering Company First Quarter 2025 Earnings Conference Call. My name is Sami, and I’ll be coordinating your call today. I will now hand over to your host, Stefan Neely with Vallum Advisors to begin. Stefan, please go ahead.

Thank you, operator. On behalf of our entire team, I’d like to welcome you to our first quarter 2025 results conference call. Leading the call today is MEC’s President and CEO, Jag Reddy; and Rachele Lehr, Chief Financial Officer. Today’s discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.

Thank you, Stefan, and good morning, everyone. Our first quarter results reflected the team's strong execution and operational discipline. This allowed us to deliver 12% sequential sales growth, margin expansion and positive free cash flow, despite softer customer demand amid continued inventory destocking. Our team's commitment to the MBX framework culture of continuous improvement and cost discipline contributed 140 basis points in sequential adjusted EBITDA margin improvement. These efforts to create a leaner cost structure allow us to operate more efficiently in this dynamic demand environment and create a platform to respond better when customer demand returns. Rachele will discuss the outlook in more detail shortly, but I would like to mention that we are maintaining our full-year guidance. Our outlook is driven by strong year-to-date execution and stronger than expected demand within our less cyclical military and other end markets. That said, we are closely monitoring the evolving regulatory and macroeconomic environment which could impact demand in the second half of the year. At MEC, we are proud to be the largest domestic metal fabricator with approximately 95% of our sales and 92% of our sourcing coming from within the United States. As we await more clarity on the long-term direction of US Trade Policy, our business is well positioned to remain highly competitive as policy shifts occur and should be relatively insulated from the direct impact of tariffs. Our domestic footprint also enables us to benefit from OEM re-shoring activity, a trend that is being accelerated by the ongoing changes in US Trade Policy. We have recently been engaged with numerous new and existing customers who are exploring options to reposition their supply chain. Given the dynamic nature of our current trade policy, we expect that this trend will take time to develop. Turning now to a more detailed review of market conditions across our primary end markets, let's begin with our commercial vehicle market which represents approximately 38% of our trailing 12-month revenues. Net sales to this market were $50.9 million in the first quarter, a decrease of 13.7% versus the prior year period. Our net sales outperformed the broader commercial vehicle market by 300 basis points as evidenced by a reported 16.7% year-over-year decrease in North American Class 8 truck production, according to ACT Research. Our outperformance was driven primarily by new project launches. As we look forward to 2025, ACT Research currently forecasts the Class 8 vehicle production to decrease 22.9% year-over-year in 2025 to approximately 256,000 units. Uncertainty around the impact of tariffs, possible regulation changes and freight rates are expected to weigh on demand in 2025, pushing out the recovery into 2026. That said, both our current guidance and ACT's forecast for 2025 do not fully reflect the potential impact to commercial vehicle demand that would result from a recession or the repeal of EPA emissions requirements. Looking out to 2026, the latest ACT forecast also continues to show full year production growing by 18.3% relative to 2025. This is driven by demand for new vehicles ahead of the deadline for compliance with EPA emissions regulations in 2027. The powersports market represented approximately 16% of our trailing 12-month revenues and decreased by 26.5% on a year-over-year basis in the first quarter. Performance during the quarter continues to be driven by customer channel inventory destocking and soft customer demand. This was partially offset by the impact of new project ramp ups. Due to the current economic landscape and uncertainty around tariffs, we remain cautious on spend for high-ticket customer discretionary items. Next is the construction and access market, which represented approximately 15% of our trailing 12-month revenues. Our construction and access revenue decreased 31.4% on a year-over-year basis in the first quarter. This reflects soft demand across both non-residential and public infrastructure markets, partially offset by ongoing new customer wins. We are closely monitoring non-residential and infrastructure demand trends. If a better than anticipated economic environment or lower interest rates can drive a recovery in construction activity, we would expect demand to recover. We do see the risk that an economic downturn could possibly prolong the current softness that we are seeing in this end market. Our agricultural market represented approximately 8% of trailing 12-month revenues and decreased by 26.9% on a year-over-year basis during the first quarter. Our results reflect weakness in both large and small agricultural markets. The outlook for agriculture remains increasingly uncertain as interest rates and inventory destocking have slowed demand. While agriculture customers are farther along with inventory destocking than customers in other segments, the impact of trade policy on crop demand has created uncertainty for farmers and the outlook for equipment demand. Turning now to an overview of substantial new business wins during the first quarter. Our team continues to execute well on our commercial growth initiatives and are already progressing well toward our annual goal of $100 million in new business wins. We have continued to expand our share with our commercial vehicle customers as they launch their next-generation models leading into the EPA regulation changes. Many of these products support future growth and will be launching in 2026 and 2027. After some strategic wins last quarter, we continue to expand our market share with our axis customer and as they continue to evaluate their global supply base. Our US manufacturing facilities located near the customer remain a key differentiator consistently delivering the best value within their supply chain. In the quarter, we were able to secure a significant program update from our aluminum extrusions business extending a multi-year contract. This project is priced utilizing our updated value pricing model which will expand profitability over the life of the program. Within our powersports market, we are seeing customers focus on introducing their next-generation products, which we expect will be a catalyst for additional commercial growth in the coming quarters. In the quarter, we secured multiple new model update wins with our primary construction customer as we further expand share with this customer across multiple product lines. Our team's execution of the MBX framework continues to deliver measurable results. We have been focused on implementing pricing improvements and disciplined cost management to strengthen our overall financial profile. The effectiveness of our MBX initiatives is particularly evident in our working capital efficiency, which has resulted in consistent operating cash flow generation. During the first quarter we generated $5.4 million in free cash flow resulting in free cash flow conversion of 44% of adjusted EBITDA. This comes during a quarter where we typically experience net working capital pressure. For the past few years we have instilled lean manufacturing practices into our business focusing on high return capital light automation advancements supporting our planned growth and improved efficiency. These enhancements, combined with our other MBX initiatives, drove consistent profitability. This helped us execute on our capital allocation strategy which prioritizes debt repayment, opportunistic share repurchases and strategic accretive acquisitions. During the first quarter our net leverage was 1.4 times. Excluding any M&A activity, we expect to be below 1 times net debt leverage by the end of 2025. Additionally, we repurchased $1.7 million of our common stock under our share repurchase program. Over the course of the last two years we have returned $9.6 million of capital to shareholders through repurchases totaling more than 646,000 shares. With more than $17 million remaining under the existing authorization, we remain committed to consistent share repurchases. At a minimum, we plan to repurchase $5 million to $6 million to offset the dilution from our annual stock compensation awards. Beyond our minimum repurchase threshold, we will evaluate additional repurchases using a return-based approach that takes into consideration opportunities to grow our business and create value through acquisitions. M&A remains a cornerstone of our value creation strategy as we seek to expand into high growth adjacent end markets and diversify our customer base. Our team has cultivated a pipeline of acquisition targets that align with our strategic criteria. While we are actively pursuing these opportunities to build upon our market-leading capabilities, we remain disciplined and committed to driving long-term shareholder value. In summary, I am extremely proud of our team's strategic execution as seen by our strong first quarter performance. We have adapted to shifting end market demands by recalibrating our cost structure and improving our operational efficiency. As the largest vertically integrated value-added manufacturing partner in the US, we offer a comprehensive suite of solutions that make us a true one-stop partner. We support our customers throughout the entire product life cycle from concept to full-scale production. With a strong presence in the industrial heartland and robust end-to-end capabilities, we are uniquely positioned to support OEMs accelerating their onshoring efforts in response to shifting US Trade Policies and the global rebalancing of supply chains. Despite a dynamic and uncertain macroeconomic environment, I remain confident in our ability to expand market share, capitalize on emerging tailwinds such as domestic manufacturing incentives and tariff structures and maintain disciplined execution. Importantly, as we continue to work closely with our OEM partners, we remain acutely focused on monitoring macroeconomic and regulatory developments across our end markets. In anticipation of potential demand shifts, our teams have developed a comprehensive set of contingency plans that can be deployed swiftly to preserve profitability and operational agility. These plans include flexible production scheduling, targeted fixed cost reductions, and the consolidation of certain manufacturing processes to improve efficiency. Should we begin to see material regulatory changes or recessionary pressures, we are well positioned to take decisive action to manage through the cycle while safeguarding our margin profile. Our continued focus remains on driving consistent profitable growth and creating sustainable long-term value for our shareholders. With that, I will now turn the call over to Rachele to review our financial results.

Thank you, Jag, and good morning everyone. Total sales for the first quarter decreased 15.9% year-over-year to $135.6 million. This decrease was due to softer customer demand across the majority of the company's key end markets and customer channel inventory destocking. This is partially offset by volume from new projects in our other end market and increased aftermarket demand in our military end market. Our manufacturing margin was $15.3 million in the first quarter, as compared to $20.9 million in the same prior year period. The decrease was primarily driven by the corresponding decrease in net sales. Our manufacturing margin rate was 11.3% for the first quarter of 2025 compared to 13% for the prior year period. The decrease in our manufacturing margin rate was attributable to lower fixed cost absorption from lower customer sales, partially offset by cost reduction actions. Other, selling, general and administrative expenses were $8.7 million for the first quarter of 2025 or 6.4% of net sales as compared to $7.8 million for the same prior year period or 4.8% of net sales. The increase in these expenses during the first quarter primarily reflects normal wage inflation and higher costs related to compliance requirements, market analysis studies and other consulting expenses. These costs will ease as the year progresses and, as customer demand returns, we expect that our SG&A will revert to our long-term targeted range of between 4.5% to 5.5% of sales. Interest expense was $1.6 million for the first quarter of 2025 as compared to $3.4 million in the prior year period due to a reduction in borrowings and lower interest rates relative to the first quarter of last year. Adjusted EBITDA for the first quarter was $12.2 million versus $18.5 million for the same prior year period. Adjusted EBITDA margin percent decreased by 250 basis points to 9% in the current quarter as compared to 11.5% for the same prior year period. Our adjusted EBITDA margin decrease was attributable to lower sales partially offset by cost rationalization initiatives. Turning now to our statement of cash flows and balance sheet. Free cash flow during the first quarter of 2025 was $5.4 million as compared to $7.9 million in the prior year period. The decrease in free cash flow as compared to the prior year reflects the impact of lower sales, offset partially by net working capital efficiencies. As of the end of the first quarter of 2025, our debt, which includes bank debt, financing agreements, and finance lease obligations, was $80.6 million, down from $143.1 million at the end of the first quarter of 2024 and resulted in a net leverage ratio of 1.4 times as of March 31. Now turning to a review of our 2025 financial guidance. We are maintaining our 2025 financial guidance which we introduced earlier this year. We continue to expect net sales of between $560 million and $590 million, adjusted EBITDA of between $60 million and $66 million, and free cash flow between $43 million and $50 million. This guidance incorporates shifting market expectations as the outlook has improved for some but softened for others. For our commercial vehicle end market, we expect sales to decrease low-single digits. The construction and access market to be flat to down low single digits. The powersports market is expected to decrease mid single to low double digits. The agriculture market to be down by mid 20%. The military market is now expected to be a mid-teens increase. And we expect our other end markets to be a high-teens increase. As Jag mentioned, there are many evolving dynamics within our end markets. We recognize the rising degree of uncertainty in these markets individually and across the broader economic environment. While we are continuing to monitor developments closely with our OEM customers, our guidance currently does not reflect a potential recessionary environment later in the year or any commercial vehicle emissions rule changes that could impact demand later in the year. In anticipation of the potential for a recession or possible changes in the commercial vehicle regulations, we have created a playbook to navigate each of these scenarios. For each, we have plans to swiftly scale our operating activities in response to demand and tactically reduce our fixed costs to preserve our margins. With respect to tariffs, we expect minimal direct financial impact to MEC, as our contracts and pricing mechanisms enable us to pass through increases in raw material costs to our customers. While these pass-throughs are expected to be modestly margin dilutive, the impact is minimal and has been fully contemplated within our current guidance. Furthermore, embedded within our 2025 adjusted EBITDA guidance is $1 million to $3 million of cost improvement driven by our MBX operational excellence and strategic value-based pricing initiatives, net of inflationary pressures. As it relates to free cash flow guidance, we expect that our capital expenditures for the year will be in a range between $13 million and $17 million. Based on our free cash flow guidance and excluding any M&A activity, we expect to be below 1 times net debt leverage by year end. With that, operator, that concludes our prepared remarks. Please open the line for questions, as we begin our question-and-answer session.

Thank you very much. Our first question comes from Ross Sparenblek from William Blair. Your line is open. Please go ahead.

Hey, good morning, guys.

Good morning, Ross.

Hey, just to kick it off here, as we think about kind of the cadence of the end markets for the second half, can you maybe just kind of walk us through anything that stands out? It looks like maybe commercial vehicles have a slight ramp in the second half, whereas powersports, ag may be more steady on the top line.

Yeah, that is correct, Ross. Our current guidance, as we indicated earlier in March when we released our guidance, includes a slight uptick in the CV market in the second half. That is related to potential 2027 regulation changes and pre-buys in both 2025 and 2026. We also said in March that our first half is going to be approximately equal to the second half of last year 2024, and that we expect a modest increase with potential pre-buys and also potential interest rate changes in the second half of 2025. As it relates to powersports, right, that market continues to be highly interest rate dependent and we don't expect any significant changes in demand forecast in powersports and similarly, in agriculture, we do not expect any recovery in 2025 and expect the recovery to take some shape in 2026.

Okay, maybe just touching on tariffs and potential for reshoring, are you seeing opportunities and, if so, if there are any markets that stand out?

We continue to have good discussions with both existing customers and new customers, as it relates to tariffs. We have provided a number of customers with quotes and pricing on potential opportunities. Given the dynamic nature of current tariff discussions and our customers are being very conservative and they are not in a position yet to make significant decisions because if the tariffs sort of magically go away in three months, right, they don't want to be stuck with a different price structure in their supply chain. So I think just like all of us, our customers are also watching day to day the developments and if there is a significant tariff impact, I think MEC is well positioned to capture those opportunities. As we mentioned in our prepared remarks, we're 100% domestic manufacturer, 92% plus of our inputs are US sourced. If you include some of the Canadian purchases of aluminum that we get, which we're actively sourcing back to the US, it's almost 95% to 96% of our inputs are domestically sourced. Given that and our locations that are really favorable to our customers operations, we're really well-positioned to take advantage of any increased tariff regime we might see in the long run.

Okay, so if we were just assuming that tariffs are structural, what is like the average onboarding timeline for a customer, or if it would be 2025, 2026?

I believe that by the middle of the year, if we establish some stable tariff systems, we could initiate a program within three to four months, and possibly even sooner depending on the program's size. Therefore, if we have a consistent tariff environment by mid-year, we could start to see some incremental benefits and support for MEC in late Q3 or early Q4.

Okay, thank you for that. I'll jump back in queue.

All right, thanks, Ross.

Our next question comes from Ted Jackson from Northland Capital Markets. Your line is open. Please go ahead.

Thanks. First of all, congratulations on just being able to control the things that you can control, it's impressive.

Thanks, Ted. Good morning.

Good morning. Sorry, I'm in an airport, so it's a little noisy right here. When you went through the outlook for your different segments, I didn't catch quite everything. What did you say for agriculture and what did you say for powersports?

We anticipate that revenues in the agriculture sector will decline by the mid-20s percentage range. For powersports, we expect a decrease in the range of mid-single digits to mid-teens.

Okay. The guide surprised me. I mean the color coming out of anyone who has any exposure within the commercial vehicle marketplaces, I mean, it's just, honestly, it's terrible. And I think that the tenor is that it's perhaps going to get worse before it gets better. And the ability for you to offset with things like military and other is impressive. So with that in mind, could you maybe provide a little more color about what's driving the improved outlook for both of those segments?

Let me start by discussing the commercial vehicle market. As we outlined in our prepared remarks, our guidance maintenance is influenced by two key factors since commercial vehicles represent nearly 40% of our revenues. The first factor is the absence of a projected recession in the second half of the year; we actually expect a slight increase in revenues during this period. The second factor involves the potential impact of changes to EPA regulations. Our current guidance accounts for some level of pre-buys in the latter half of this year and into 2026. If the EPA were to alter the new regulations set for 2027, it would have two main effects. The first is related to the GHG level three changes, which do not significantly impact our commercial vehicle customer volumes, as these regulations simply require the production of more electric vehicles. Therefore, if this is canceled, we do not anticipate a notable volume impact for our customers. The second aspect of the 2027 regulatory changes involves NOx emissions. Currently, engines are permitted to produce up to 200 milligrams of NOx, but the new regulations will lower that limit to around 35 milligrams. This change is legally mandated to take effect in 2027, and altering this would require considerable effort from the administration to change the law and suspend those regulations. Should such changes occur, it would significantly influence the industry, especially concerning pre-buys in 2025 and 2026. However, if we look at the three-year horizon, we expect the volumes to normalize rather than disappear, smoothing out the peaks and valleys typically seen in the commercial vehicle sector. As it stands, we are holding to our guidance, considering these two factors: no recession in the second half and no alterations to the 2027 NOx regulations from the EPA. If we observe any developments on these fronts in the near future, we will gladly reassess our guidance and communicate any potential impacts on our revenues for 2025 and 2026.

And I would just add, this goes back to your opening statement, Ted, control what we can control. And so that's where we have developed our playbook of the different scenarios and so should any of these events take place, we have the playbook lined out so we can execute swiftly and control our margins, manage our margins.

And I was remiss in welcoming you to the quarterly calls. I look forward to working with you, Rachele.

Thank you, Ted.

Our next question comes from Andrew Kaplowitz from Citigroup. Your line is open. Please go ahead.

Hi, good morning. This is Natalia Bak on behalf of Andy Kaplowitz.

Good morning, Natalia.

Good morning, Natalia.

So I guess the first question I want to ask is how would you describe the tone of customer conversations today compared to 3 to 6 months ago, based on your commercial team's engagement? Are customers more in a reactive wait-and-see mode, or are they still actively looking into new projects?

I would say that the customers in certain end markets like ag and powersports, they are continuing to focus on destocking and continue to alter their production volumes to make sure that the channel inventories get cleared out. So, in those end markets, the conversations have been slightly muted, even though in our prepared remarks we talked about winning new business in construction, winning new business in powersports, et cetera. So we are actively engaged with every one of our customers, but we also recognize that our OEMs have their own challenges that they're trying to deal with and we're standing by them to support their activities, whether it's new product introductions, whether it is channel inventory reductions or preparing for 2027 launches. As we said also in our remarks, we're on track to win approximately $100 million of new business. In fact, as I sit here, end of April, we're ahead of our schedule in terms of winning new business even in this environment. But mind you that a lot of those programs we're winning right now are either 2026 starts or even 2027 starts, right. So we're always focused on long-term business development and long-term growth for the company, while as Rachele mentioned, trying to control what we can control in the short term. When it comes to commercial vehicle customers, we all follow ACT forecasts. ACT forecasts have been more conservative than what our OEMs have indicated, both publicly and what we see in our forecast from them, right. So we're taking a cautious approach to the CV end market because we know that there are some unanswered questions, particularly around EPA regulations that we just talked about. So with all of that, we're continuing to work with our customers, continuing to look for opportunities to support them and we're engaged with a couple of powersports customers where they're evaluating how much of their Asia-made components they want to bring back to the US. Our teams have been extremely busy in answering inquiries around re-shoring and on-shoring opportunities. So it's an exciting time for us because, yes, there seem to be some dark clouds on the horizon, but our team is highly engaged with our customers. We're trying to control our cost structure and we're cautiously optimistic about some sort of settlement towards this tariff regime, whether it's structural or not. We'll have some clarity in the coming months and we're still planning on our second half being slightly positive compared to our first half.

Got it. That's helpful. And then just two follow up questions to that, I guess. First question as a follow up, could you help us better understand your revenue mix in terms of long-term reoccurring programs for short cycle or project race work? Has that mix shifted over time and does it influence your visibility into the second half of this year and fast forward 2026?

So generally speaking depending on the size of the program, it might take us three months to start up a small program to 18 months to start up a really large program. So given the mix of new business we're winning, a significant portion of the new business we're winning right now is perhaps 2026 or 2027 startups. And the rule of thumb is if we don't have that business in our bag by middle of the year, that's generally 2026 startup. Having said that, the tariff regime has opened up some opportunities for us, we're actively working them as we speak. That could be potential second half startups. We're encouraged to buy some of those activities and as they materialize more, we'll be happy to share more about them. And by the way, some of those opportunities, as I said, are in powersports, some of them are in electrical infrastructure, some of them are related to data centers. So some of these non-legacy end markets as well are coming to fore where we're really excited to support these new customers.

And those new opportunities are the place where we're able to put in our strategic value-based pricing model. And so as we look to the long term, in 2026, 2027, you'll see more of that in place as you look to our margins versus what you're seeing now because probably now only 5% to 10% of our programs are under that and we'll have far more in 2026 and 2027.

Okay, got it. That's really helpful. And then last question for me. Just focusing on the agricultural end market, ag came down mid-20s this year that you are forecasting. How should we think about timing for recovery? Are you modeling 2026 as a bounce back here or expecting more of a gradual return?

It still continues to be a dynamic environment. Current tariff regime doesn't really help. As farmers are looking at potential recovery in crop prices and exports, current high tariffs from countries like China do not really help US farmers. Having said all of that, the latest Purdue University ag survey, for the first time in a long time, indicated a positive uptick in farmer sentiment. That is something that really for us to watch as we go through 2025. Our initial assumption is that 2026 will be a gradual recovery for ag, but given the changes in global trade policy and potentially some increased farmer sentiment, it is possible that we could see a bounce back, but that's not something that we are planning at this point, but we're closely watching it.

Okay, got it. That's super helpful. Thank you.

Thank you.

Our next question comes from Ross Sparenblek from William Blair. Your line is open. Please go ahead.

Hey guys, just a couple more here, if you don't mind. Taking on the new business opportunities and 100 million target, can you just update us on the progress here today and what the mix has been between new and existing customers?

I think we're on by end of April, Ross, we're somewhere between 35 million and 40 million of new business booked. That's a little bit ahead to do the linear math, right, it's a little bit ahead timeline wise to our $100 million target. Our sales teams are really active with existing customers. That is our first focus. And we continue to see a good set of wins in the CV market and also powersports and we mentioned as well construction and access market. So I would say that in all of these end markets, we're making good progress. What I call farming versus hunting. Our team is excellent in farming, we're from the Midwest, we know how to do that really well. But at the same time, we have had a significant focus since last year to look at new opportunities and new customers and new end markets. So we continue to engage with new customers in data center and electrical infrastructure and other end markets that are seeing secular growth. So those are the end markets we're excited about. We're having good conversations with them. I would say the 35 to 40 million I just mentioned to you, a significant portion of that is existing customers with a sprinkling of new customers. But our pipeline is really strong and I'm fully confident that our teams will hit the $100 million new business target this year. And I do expect as we go into the second half that we will see some new customers added to our list.

Yeah, no, that's great to hear. Maybe just kind of conceptualizing this growing program funnel, do you think that there could be some momentum here? I mean, is there a chance we could exit here at 120, 160, or was this more of a seasonality to the start of the year?

It's hard to tell. Look, as you mentioned earlier, right, if the tariffs are going to be structural, right, that's a huge advantage for MEC. So we will wait and see. Of course, right, like many of us, we want more US manufacturing, we want certain level of competitiveness for US companies. So given all of that, I'm optimistic that with even some small structural changes, we will be able to gain ground and gain more business in the second half.

Okay. Well, yeah, just understanding the potential for kind of a lower for longer scenario here in some of the core markets. I mean, it'd be great to gauge your confidence level today around maybe achieving just the lower end of the 2026 revenue targets. Spending the time contribution of new business opportunities versus what would be required for a macro recovery.

That's a great question. As we discussed in our last earnings call, our perspective on 2026 remains unchanged. We still expect to reach the lower end of our 2026 revenue range, unless there is a significant downturn in the economy or major changes to EPA regulations. These are the two conditions I want to highlight. If neither of those situations occurs, we are confident we can achieve the lower end of the range in 2026.

Okay. But even with the push out of the regulations, I mean, that's maybe 50 million in business, so 700 is still kind of a win in this environment.

I agree with you. At the same time, I want to mention that we are actively seeking M&A opportunities. Our strong balance sheet and robust free cash flow generation capabilities position us well. We will see how the year progresses, but there is a good chance we could enter new markets that would contribute to our growth through M&A as well.

Yeah, that's actually a great segue here. Just thinking about kind of the pipeline for M&A, how are you guys prioritizing end market diversification versus maybe geographic reach or additional manufacturing capabilities? Is there a top target for you right now?

Thank you for the question. Our primary focus is on diversification, especially since many of our end markets experienced similar downturns this year, which highlighted the need for us to diversify further. So, diversification is our top priority. The second priority is improving our margin profile, and the third is staying close to our customers, potentially with different geographic exposure within the U.S. We're not expanding internationally, as we remain a U.S.-based manufacturing company. We're considering areas in the southern states, as outlined in our M&A strategy on our website. We have a sufficient number of targets in our pipeline that align with these criteria, and we're excited about our prospects in the coming year.

That's great to hear. Thanks again guys. Congrats.

Thanks, Ross.

Thank you.

We currently have no further questions, so I'd like to hand back to Jag Reddy for some 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.

Thank you very much for joining. You may now disconnect your lines.