Earnings Call Transcript - MEC Q2 2023

Operator, Operator

Hello and welcome to the Mayville Engineering Company’s Second Quarter 2023 Earnings Call. My name is Elliot and I will be coordinating your call today. I would like to hand over to Stefan Neely with Vallum Advisors. The floor is yours. Please go ahead.

Stefan Neely, Vallum Advisors

Thank you, operator. On behalf of our entire team, I’d like to welcome you to our second quarter 2023 results conference call. Leading the call today is MEC’s President and CEO, Jag Reddy; and Todd Butz, Chief Financial Officer. Today’s discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.

Jag Reddy, President and CEO

Thank you, Stefan, and welcome to those joining us on the call and webcast. Our second quarter results demonstrated favorable demand conditions across our key end markets, together with early benefits of targeted price actions, cost discipline, and improved asset optimization. In recent months, we have experienced solid organic sales momentum across key customer accounts, which has supported improved utilization across our operations, a key area of focus for our entire leadership team. Through our MBX value creation strategy, MEC has become an increasingly cash-generative business, focused on targeted commercial expansion within higher-value markets, improved operational efficiency, and disciplined capital allocation. For the quarter, we have delivered more than $18 million in free cash flow, excluding a one-time deferred compensation payout, continuing to position us to fund a combination of organic and inorganic growth investments together with opportunistic open market repurchases of our common equity. To that end, during the second quarter, we repurchased $1 million worth of common equity under our $25 million shares repurchase program with $18 million remaining under the existing authorization as of June 30. In July, we closed on our acquisition of Mid-States Aluminum, providing us with a strategic entry point into high-value lightweight materials fabrication, positioning MEC to grow our share of wallet with existing accounts, most notably in our commercial vehicle, powersports, and agriculture end markets, while building leading market positions within emerging high-potential industries. The integration is moving forward seamlessly, with both MEC and MSA teams collaborating to provide our combined customer base with a full life cycle of on-demand solutions that include design, engineering, and customer fabrication. I will discuss the revenue and cost synergy opportunities here in more detail shortly. While demand conditions remained stable during the second quarter, near-term supply chain disruptions and fixed cost under absorption from new program launches impacted adjusted EBITDA and adjusted EBITDA margin rate. Fixed cost under absorption at Hazel Park alone impacted the second quarter adjusted EBITDA and adjusted EBITDA margin by $1.4 million and 100 basis points, respectively. Excluding the impact of the Hazel Park ramp-up, our normalized adjusted EBITDA margin rate was 12%. We currently expect Hazel Park to reach full utilization by year-end 2024, which, based on our current estimates, could contribute an additional $15 million to $20 million of annualized EBITDA to our business. Turning now to a review of market conditions across our 5 primary end markets. Let’s begin with our commercial vehicle market, which represents 40.7% of our trailing 12-month revenues. During the second quarter, commercial vehicle revenue increased 2% on a year-over-year basis, driven by strong demand and elevated build rates. Customer demand requirements continue to indicate slowing demand in the second half of the year and into 2024 as the industry navigates regulatory changes as well as a general slowing in economic activity. However, projected build rates for the second half of the year have consistently improved relative to where they were a quarter ago amid resilient macroeconomic conditions. Currently, ACT Research forecasts that Class 8 vehicle production will increase 4.3% year-over-year in 2023 to 328,000 units followed by a 15% decline in 2024. While supply chain constraints have continued to impact our commercial vehicle customers, this has only resulted in deferred volumes that will be delivered in the second half of the year. Next is the construction and access market, which represented 19.3% of our trailing 12-month revenues. Construction and access revenue declined 10% on a year-over-year basis in the second quarter given weaker fundamentals within the residential housing market, which continues to be impacted by the elevated interest rate environment. Our sales during the quarter were also impacted by customer supply chain constraints. While residential construction trends appear to have trough and infrastructure and energy market demand remained stable, we still expect to see demand softness year-over-year through the remainder of 2023, with the potential for improvement in 2024. The powersports market represented 16.6% of our trailing 12-month revenues and increased by 7% on a year-over-year basis in the second quarter. We continue to benefit from market share gains, which includes new customer programs, which were partially offset by a cooling in customer discretionary spending. Given current market conditions, we anticipate customers will seek to bolster demand through rebates and incentives over the course of the current year. On balance, we see the opportunity to grow our share of wallet in the current year, positioning us to drive incremental sales growth in the powersports market. Our agriculture market represented 10% of trailing 12-month revenues and decreased 13% on a year-over-year basis during the second quarter. The decrease during the quarter was primarily driven by a decline in small ag equipment demand as large ag continues to be strong. This trend is in line with our expectations as global food stocks remain tight and crop prices remain elevated, while inventory of both new and used machinery remains slow. Given elevated crop prices, we believe producer demand will increase in 2023, supporting further large ag equipment demand, which should mitigate the softness in small ag demand. Our military market represented 5.8% of trailing 12-month revenues and increased 66% on a year-over-year basis in the second quarter, driven by new program wins and build rate increases. Our customers have solid contractual backlogs with the U.S. government, and we continue to see good volumes based on new vehicle introductions and related programs. However, we foresee volume growth moderating later in the year due to the expected expiration of some legacy projects. At this time, we see no indications of slowing in our customers’ pace of activity. Moving now to an update on our MBX initiative. During the second quarter, we continued to progress in the implementation of our MBX value creation framework. I am pleased to report that we are on track to achieve the objectives we laid out last fall when we first announced the MBX initiative. We will provide further details at our inaugural Investor Day planned for September, but I would like to highlight a few key updates from this quarter. MBX represents a key area of strategic focus for our team as we position MEC to achieve consistent above-market performance throughout the cycle and capitalize on multi-year reshoring and outsourcing mega trends among major OEMs. At a commercial level, our focus remains on expanding our integrated solution suite within both existing customer accounts together with targeted growth in higher-value growing adjacent markets, including clean tech and energy transition. Allow me to share some of the commercial milestones we achieved during the second quarter. We continued to launch new products and expand our relationship, supplying battery thermal management products. This relationship will continue to expand as our customer grows their electric vehicle battery systems. Leveraging the significant growth in the powersports market we had in 2022, particularly with the new customer, we expanded further with new products, and we are building momentum through the second half of 2023 with significant launch activity. Within the second quarter, we made progress on securing additional market share within our large agriculture and construction customer. These new parts were related to next-generation products and were based on our strong engineering efforts during the product development process. Given the upcoming emissions regulation changes occurring over the coming years, many of our commercial vehicle customers are continuing to develop their next-generation products, including battery electric vehicle offerings. We are focused on expanding our market share during these product changes, and we continue to make progress in the quarter for vehicles that will begin production in 2024. The other pillar of MBX is commercial excellence, where our focus is to implement strategic and value-based pricing models across our customer programs. Year-to-date, the teams have been working tirelessly to implement a programmatic pricing model. We have already seen some benefits from these efforts through the second quarter, but we expect to see pricing benefits ramp up further in the second half of the year. On the operational excellence front, we have continued our rigorous implementation approach centered around our quarterly presence in Kaizens, supplemented by monthly operational and commercial excellence Kaizens. During the second quarter, we completed 36 Kaizens with a focus on sustainability of cost-saving measures identified. Overall, our team is tracking to the savings and KPI target improvements that underpin our 2023 financial expectations. We look forward to providing a comprehensive update on these improvements, along with multi-year performance targets at our first-ever Investor Day next month at our Hazel Park, Michigan facility. On the commercial expansion front, the second quarter was very eventful for us with the announcement of the MSA acquisition, our first since becoming a public company. As we announced on July 5, we successfully completed the acquisition on July 1, and the integration is well underway and on track to our expectations. Given the steady demand in our end-markets, together with improved plant utilization and 6 months of contributions from the MSA acquisition, we anticipate 100 to 200 basis points of second half adjusted EBITDA margin expansion relative to the first half of the year. From a capital allocation perspective, having completed the MSA acquisition, our primary focus will be on utilizing free cash flow to repay our debt. At this time, we intend to reduce net leverage to below 2x within the next 18 months. Given our current forecast, we anticipate strong free cash flow conversion in the second half of 2023 and going into the full year 2024. As evidenced in the second quarter, our free cash conversion exceeded 75% when excluding a one-time deferred compensation payout, and we expect strong conversion to recur in the second half of the year. While our capital spending year-to-date has been minimal, we expect our total CapEx for the year will be in the $15 million to $20 million range. Our capital investment strategy remains rooted in pursuing opportunistic investment in equipment that will yield attractive returns on capital. In summary, we delivered on several important strategic milestones during the second quarter, consistent with our MBX value creation priorities. Looking to the second half of the year, demand conditions remain stable across our end-markets, even as we maintain our price discipline. The MSA integration is on track, providing MEC customers with an expanded suite of capabilities and integrated solutions that will support our longer-term margin expansion targets we remain committed to. With the addition of MSA, we are focused on executing a seamless integration and look forward to the growth opportunities that we will be positioned to pursue going into next year. With that, I will now turn the call over to Todd to review our financial results.

Todd Butz, Chief Financial Officer

Thank you, Jag. I will 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 0.5% on a year-over-year basis to $139 million, driven by a combination of improved sales volumes and continued price discipline, partially offset by lower material price pass-through to customers. Excluding the impact of material price pass-through, our second quarter sales would have increased 6.5% on a year-over-year basis. Our manufacturing margin was $16.1 million in the second quarter as compared to $18.3 million in the same prior year period. The decrease was driven by an increase in employee health insurance claims, unabsorbed fixed costs associated with project launches, a $500,000 impact from a one-time field replacement claim, and a $700,000 decline in scrap income. Our manufacturing margin rate was 11.6% for the second quarter of 2023 as compared to 13.2% for the prior year period; a decrease of approximately 160 basis points was due to the reasons just discussed. When excluding the impact of these items, our manufacturing margin would have been 14.6% or an increase of 140 basis points as compared to the prior year. Profit sharing bonus and deferred compensation expenses increased by $1.5 million to $2.7 million for the second quarter of 2023, primarily driven by lower deferred compensation expense during the prior year period related to fluctuations within the financial markets. Other selling, general and administrative expenses were $7.4 million for the second quarter of 2023 as compared to $6.4 million for the same prior year period. The increase is primarily attributable to the $900,000 of expenses related to the MSA acquisition, which was added back to adjusted EBITDA during the second quarter. As such, we continue to believe that SG&A expenses on a go-forward basis will be approximately 4.5% to 5.5% of sales. Interest expense was $2 million for the second quarter of 2023 as compared to $765,000 in the prior year period due to higher interest rates and higher borrowings under our credit facility. Due to the increase in our borrowings at the end of the quarter associated with the MSA acquisition, we expect that our interest expense will be higher on an absolute basis going forward based on our current borrowing rates. Adjusted EBITDA decreased to $15.3 million versus $18.2 million for the same prior year period. Adjusted EBITDA margin percent declined by 210 basis points to 11% in the current quarter as compared to 13.1% for the same prior year period. The decrease in our adjusted EBITDA margin was due to a $1.8 million increase in employee health insurance costs and the $1.4 million impact of the ramp-up of Hazel Park. Turning now to our statement of cash flows and balance sheet. Cash flow provided by operating activities during the second quarter of 2023 was $0.2 million as compared to $16.1 million in the prior year period. The expected decrease in operating cash flow was entirely due to the $17.6 million deferred compensation payout made to our former Chief Executive Officer. Excluding the impact of this payout, our cash provided by operating activities would have been $17.8 million during the second quarter, an increase of 10.6% relative to the prior year period. Our resulting free cash flow conversion rate exceeded 75%, and we are projecting to generate an additional $25 million to $35 million in free cash flow in the second half of the year. Capital expenditures for the second quarter of 2023 were $3.9 million as compared to $13.4 million during the second quarter of 2022. The decrease in capital expenditures is a result of the completion of the initial capital investment in the Hazel Park, Michigan facility, which was finished in the second half of 2022. As of the end of the second quarter of 2023, our net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents, were $89.7 million as compared to $79 million at the end of the second quarter of 2022. Cash and cash equivalents included in net debt were $90.1 million, which relates to the $90 million of funds held in escrow to fund the MSA acquisition which closed on July 1. Furthermore, as of June 30, our net leverage ratio was 1.6x. Additionally, as noted in our press release on June 29, we entered into an amended and restated credit agreement that provides for an additional $50 million of availability under our credit facility, while retaining an uncommitted accordion feature of $100 million. The new credit agreement also allows for a maximum leverage ratio of 3.5x, up from 3.25x in our previous agreement. Furthermore, when accounting for the four-quarter leverage holiday following an acquisition, that takes our total maximum net leverage ratio to 4x for the next year. As we have stated, it is our intention to use free cash flow generation to reduce our net leverage ratio to between 1.5x and 2x over the next 18 months. Now turning to our 2023 guidance. Today, we are increasing our financial guidance for the full year 2023 due to the closing of the MSA acquisition. For the full year 2023, we expect the following: net sales of between $580 million and $610 million, adjusted EBITDA of between $66 million and $71 million, and capital expenditures of between $15 million and $20 million. Our increased financial guidance captures continued steady customer demand and improved plant utilization, resulting in adjusted EBITDA margin expansion relative to the first half of the year. In addition to these dynamics in our legacy business, our increased guidance range includes the expected $30 million to $35 million of incremental revenues and $4 million to $6 million of incremental adjusted EBITDA associated with the MSA acquisition. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question-and-answer session.

Operator, Operator

Thank you. Our first question comes from Mig Dobre with Baird. Your line is open.

Joe Grabowski, Analyst

Hey, good morning, guys. It’s Joe Grabowski on for Mig this morning.

Jag Reddy, President and CEO

Good morning, Joe.

Joe Grabowski, Analyst

Hey, good morning. I had a number of questions around guidance. I just want to make sure that I understand it. Maybe starting with raw material price pass-throughs. It looks like you’re expecting a continued drag in the second half but better than the first half, maybe a total of around $6 million in the second half. Just wanted to confirm that I’m calculating that correctly.

Todd Butz, Chief Financial Officer

Yes, Joe, I think you’re thinking of that in the right manner. Year-to-date, we’ve had about $17 million of material price pass-through relative to the first half of ‘22. That really declined in the second half. As we did see steel in the latter half of last year already start to come down. So that change from year-to-year will be less in the second quarter or second half of the year.

Jag Reddy, President and CEO

Just to add to that, I just wanted to point out that from a headline perspective, even though we show only 0.5% sales improvement in Q2 without the material pass-through, as you just indicated, our revenues are actually up in Q2 6.5%. So I just want to drive home that point. Sometimes that point can be missed in reading our results, given the material pass-through.

Joe Grabowski, Analyst

Right. No, definitely understood. And then on the EBITDA, adjusted EBITDA guidance, obviously, you’re layering in MSA. But ex-MSA, I guess, maybe you took down the midpoint of the range just a little bit. Again, I want to make sure I have that right and what caused the midpoint – the core midpoint to go down a little bit.

Jag Reddy, President and CEO

I wouldn’t say that we took down the guidance; we will probably tighten the range, is how I would position that. It’s simply for a couple of reasons, as I’m sure you have questions around our Construction Access segment. Our construction access market continues to be soft, as we indicated in prepared remarks, and some of that volume is missed volume for the year, whereas even though we had similar supply chain disruptions with a couple of our CV customers in Q2, we expect that to be picked up in Q3 as the customers continue to make up those volumes. So, given some of that, we just wanted to be a little more conservative and tighten our range for the year.

Todd Butz, Chief Financial Officer

And Joe, on the EBITDA front, when you think of the base business, the legacy business without MSA, the addition of that, a lot of those challenges have already occurred in the first half, and I do want to highlight that we have achieved a 200 basis point margin improvement on the legacy business as we look into the second half of this year. A lot of the things we’ve talked about with the project launches in Hazel Park and a few other locations are going to start moving into production, utilizing those assets. MBX continues to gain ground. And as Jag said on the call, we have some pricing initiatives as well. So, we feel really good about the margin expansion into the back half.

Joe Grabowski, Analyst

Yes. No, I saw that. It looks like maybe assuming around a 12.5% EBITDA margin in the second half with the guidance midpoint, which is definitely an improvement from the first half. Just a couple of quick questions on MSA, and then I’ll pass it along. I believe MSA revenue in 2022 was $86 million. You’re going to own it for half a year, and you’re guiding to $30 million to $35 million. So maybe just explain kind of the delta between the $86 million last year in the, again, half a year, $30 million to $35 million?

Jag Reddy, President and CEO

Yes. So, when we began talking to MSA late last year and into this year, we knew coming into 2023 that their revenues were going to be approximately half of what they realized in 2022. That’s because one segment that they were participating in, that is the RV market, had significant sales in 2022. We knew that the RV market was going to be down, and in fact, they will probably realize almost zero revenues in 2023 from that end market. So, we knew that coming in, and our intent from the beginning was to use that capacity, extra capacity that is going to be available at MSA to drive further sales synergies with our commercial vehicle and our power sports and our ag customers. So that’s why we’re not concerned about where MSA revenues are in 2023. We expect to gain significant revenue synergies in 2024 and beyond.

Joe Grabowski, Analyst

Got it, and last question, and I’ll pass it on. You’ve owned MSA for a little over a month now. Any initial learnings? Anything that maybe you didn’t expect when you told us about the deal back in June?

Jag Reddy, President and CEO

I can tell you today that since we announced the transaction and closed the transaction, I’ve been there more times than any other non-naval location within our network, given how solid it is, being just minutes away from our headquarters. Every single time I leave MSA facilities, I am more excited about MSA and the future of MSA, and my enthusiasm continues to grow every time I talk to the employees that came on board with MSA. My enthusiasm continues to grow as our sales teams continue to talk to our existing customers in some of the markets I just mentioned. So, the future for MSA within MEC is bright, and I couldn’t be prouder of the MEC team and the MSA team that came together, worked really hard for almost 9 months to make this a reality.

Joe Grabowski, Analyst

Absolutely. That sounds great. Thanks for taking my questions, guys. Good luck.

Jag Reddy, President and CEO

Thanks, Joe.

Operator, Operator

We now turn to Vlad Bystricky from Citi. Your line is open.

Vlad Bystricky, Analyst

Good morning, guys. Thanks for taking our call.

Jag Reddy, President and CEO

Hi, Vlad.

Todd Butz, Chief Financial Officer

Good morning.

Vlad Bystricky, Analyst

So can you talk about the conversations that you’re having with customers about their reshoring plans and whether you’re actually seeing evidence of them moving forward with these plans and therefore, contributing to growth runway from MEC?

Jag Reddy, President and CEO

Sure. If you remember, when I came on board about a year ago, we talked quite a bit about both reshoring and onshoring. So, I would capture those trends in one bucket rather than as separate buckets. Many of our customers in power sports and other markets, particularly power sports, had components that they were producing in Asia, and many of them continue to bring some of those components back into the U.S. or North America, and we continue to be beneficiaries of those reshoring projects. We talked even in the prepared remarks about a customer in power sports that we’re winning more business with. All of those prove to us that the reshoring trend is real, and MEC has been a beneficiary. At the same time, many of the other applications that we supply components to are some large applications, think of military, think of agriculture or commercial vehicles. The components of size, weight, and volume of these components are large, and they were never made overseas; that portion of our business continues to be strong, and we don’t expect to benefit from the reshoring aspect of that. Where we are benefiting in those markets is from outsourcing. I can give you multiple examples of our customers where they are choosing between making or buying those components. As we previously discussed, we have a CV customer where we are completely taking over production from one of their manufacturing locations. So, we’re investing in a significant production line with substantial capital in our Atkins facility, where in Q3, we’re actually going to launch a brand-new fuel tank for one of our large CV customers. That’s a complete outsourcing. They were repapering their production line as soon as we’re up and running and exiting using that component internally. So, many of our customers are tightening their capital, resources are scarce. They would rather choose to deploy their engineers, technicians, and production associates to next-generation products such as battery electric vehicles and so on. So, that’s another area where we’re gaining significant share of wallet in our end markets to continue to take over business from our customers.

Vlad Bystricky, Analyst

That’s really helpful color, Jag. I appreciate it. And then maybe just one follow-up for me. On MBX. I seem very focused and excited around the commercial pricing initiatives you have underway. Can you talk about some of the specific changes that you’re implementing in that commercial pricing initiatives? And how you expect those initiatives to structurally impact profitability going forward?

Jag Reddy, President and CEO

Yes. Certainly, Vlad, at our Investor Day, we’ll be able to provide additional color in more detail. But today, what I can tell you is that in the past year, certainly in the past 6 to 9 months, we have done an immense number of PPI Kaizens, what I call a transactional process improvement Kaizen, where we have looked at our pricing methodology, frameworks, and processes. We have continuously tried to improve how we not only capture value for our customers, but also how we capture value for MEC. Historically, our pricing was on a cost-plus basis. We’re on a journey to adopt a value-selling pricing approach. While we’re not there yet, it’s a multi-year journey. I’ve done that with multiple companies in my past. The beginning steps are about a disciplined, structured, programmatic approach to pricing, and that’s where we are right now. We expect to see good readouts starting in the second half of this year. Part of it is preventing leakages. For example, if we pass on a top line increase of 3%, are we truly capturing that 3% once our net capture rate is accounted for? We've found significant opportunities for improvement. We continue to review our cost to serve, analyzing margin expectations and factors like payment terms, the complexity of components, and the value addition we provide. These are all elements now programmatically put in place to ensure we effectively capture value back to MEC moving forward. I am really excited about what this body of work can do for MEC.

Vlad Bystricky, Analyst

Great. That’s helpful, Jag. Thanks. I will be back in the queue.

Operator, Operator

Our next question comes from Ted Jackson with Northland Securities. Your line is open.

Ted Jackson, Analyst

Thank you. So, most of my key questions have been asked, but I have just a couple of more market-oriented ones. One would be on the construction and access side. You commented that we might be hitting the trough in residential markets, and Caterpillar more or less said the same thing, feeling that the residential market in North America is stabilizing. Is that reflected in your view regarding the second half?

Jag Reddy, President and CEO

Yes, that’s right, Ted. I think we are at a point where we’re seeing stability in the market for us. As you know, we have both construction equipment and access equipment in our end market. Approximately a 60-40 split exists here. Our end customer continues to see supply chain disruptions. They reported being at about a 75% supplier rate, which impacted our planned volumes. But we are cautiously optimistic that the second half could provide some improvement. I know there are green shoots in homebuilding as we see a tightening supply of existing homes; builders are planning new permits, etc. Therefore, the second half might bring a period of stabilization and potential recovery for us.

Ted Jackson, Analyst

Thanks. And then my next question is just on the military market. You had substantial growth there. You discussed that some of it was driven by new programs, and some by build rate increases. Is the growth more dependent on new programs or build rate increases?

Jag Reddy, President and CEO

The two major programs that have been crucial for us are on AM General’s HUMVEE program and Oshkosh’s JLTV program. HUMVEEs have seen significant production rate increases due to the war in Ukraine and the depletion of U.S. inventory. We are hopeful that these factors will continue to positively impact our second half. Regarding JLTVs, we have limited exposure now through Oshkosh but expect to see benefits as AM General wins that program. We are moderating growth rates in the second half to be prudent about the potential impact of these draw-downs.

Ted Jackson, Analyst

Great. That was nice color. My last question is just on the MSA acquisition and the capacity you mentioned, with a prior note about 30% capacity utilization. Looking forward, how long do you think it will take for you to fill that capacity?

Jag Reddy, President and CEO

It’s a great question, Ted. One of the reasons we were attracted to MSA was due to that underutilization, as a small company, MSA could not get on supplier lists of major customers. Since announcing and closing our transaction, we have begun discussions with many of our major OEMs. We are in the process of certifying MSA. This certification will take a couple of months, but we expect that by the end of this year, MSA will be on the list of suppliers allowed to bid for contracts. We foresee 2024 as the year when we start seeing some wins and filling that existing capacity at MSA.

Ted Jackson, Analyst

Great. I just want to finish with the comment that the cash flow generation you all put off this quarter was very impressive. It showcases what the future holds for MEC with the capacity you can fill with MSA and Hazel Park. It’s exciting to see where this business is going into ‘24 and ‘25. Thanks.

Jag Reddy, President and CEO

Thank you for the recognition, Ted. We are very excited about cash flow generation going forward, not only in the second half but also well into the future. We can see moderating of our CapEx plans for not only 2023 but hopefully beyond. Given our ability to drive additional cash flow generation, we are very focused on this.

Operator, Operator

Our final question today comes from Tim Moore with EF Hutton. Your line is open.

Jag Reddy, President and CEO

Good morning Tim.

Tim Moore, Analyst

Thanks. Good morning. Most of my questions were already answered, but I have three remaining. Jag, I know you are – I don’t want to steal your thunder for your September Investor Day. That’s clearly going to provide more details on the MBX initiatives. But just so I understand, for now, you expect a 40 basis points to 70 basis point margin boost from MBX this year. I am trying to think about next year.

Jag Reddy, President and CEO

Thank you for that question, Tim. We are not in a position to provide any guidance for next year. However, we do expect a tailwind from our MBX ramp-up in 2024 as well as from Hazel Park reaching its full utilization next year. That is a good framework to think about. To clarify on Hazel Park, we talked about $100 million of ramp-up in revenues by the end of 2024. We are on track to achieve close to $20 million to $25 million in revenues out of Hazel Park this year, and we are also working on starting that production up.

Tim Moore, Analyst

Jag thanks. I am wondering how the onboarding of the battery thermal management customer has gone. I know it was delayed intentionally for quality assurance reasons. Is that going now? And will most of that be in Hazel Park?

Jag Reddy, President and CEO

Most of that will be in Hazel Park, Tim. We are in the process of getting the same IATF certification there as well. That’s been a hurdle to get that customer online. I expect Q3 to be the quarter when we will start production for that battery electric vehicle component customer.

Tim Moore, Analyst

Great. That’s very helpful. Lastly, what is the update on supply chain shortages for your customers? Has that improved over the past couple of months, or is it the same as in the March quarter?

Jag Reddy, President and CEO

It’s a good question. There are two end markets where we experienced some supply chain disruptions: one in the commercial vehicle market. Two large customers we work with had some disruptions. One had approximately five days of line downs during the quarter, so they can catch up with all the products needed for the assembly line. They are back in Q3, and we expect that volume to be captured in Q3. The second CV customer had similar frame rail issues coming out from one of their suppliers out of Mexico. They were down and had reduced run rates in Q2, however, they are working in Q3 weekends, and we are supporting them with weekend production to catch up. I am optimistic about the commercial vehicle market; their order book is strong. With regard to access, we remain cautious about whether customers can catch up on the lost volume for the year, which is one reason for tightening our ranges.

Tim Moore, Analyst

Jag, that was terrific color on the commercial vehicle side and helps explain beyond the price pass-through drag for the top line. That’s it for my questions.

Jag Reddy, President and CEO

Thank you, Tim. Appreciate it.

Operator, Operator

This concludes our Q&A. And I will now hand back to Jag Reddy, President and CEO for closing remarks.

Jag Reddy, President and CEO

Well, once again, thank you for joining our call. As we announced on July 20th, we intend to host an Investor Day on September 14th at our Hazel Park facility in Metro Detroit. At this event, we look forward to providing a more comprehensive update on our strategy and our expectations for the coming years. Should you have any questions or be interested in attending the event, please contact Noel Ryan or Stefan Neely at Mayville, our Investor Relations Council. This concludes our call today. You may now disconnect.

Operator, Operator

Ladies and gentlemen, today’s call has now concluded. We would like to thank you for your participation. You may now disconnect your lines.