Q4 2020 Mayville Engineering Company Inc Earnings Call
Good morning, and welcome maybe on Engineering company fourth quarter, 2020 earnings Conference call.
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And I like the current conference over.
Nathan Elwell Investor Relations. Please go ahead.
Thank you welcome.
And welcome everyone and thank you for joining us on today's call a few quick items before we begin first please note that some of the information you will hear during this call will consist of forward looking statements within the meaning of section 21, a of the Securities Exchange Act of 1934 as amended.
Such statements Express our expectations anticipations beliefs estimates intentions plans and forecasts.
These forward looking statements involve risks assumptions and uncertainties and actual results could differ materially from those in the forward looking statements for more information regarding such risks and uncertainties. Please see our filings with the Securities and Exchange Commission, including our filing on form 10-K for the period ended December 31st 2019.
<unk> and our filing on form 10-Q for the period ended September 30th 2020, we assume no obligation and do not intend to update any such forward looking statements, except as required by federal Securities laws.
Second this call will involve a discussion of certain non-GAAP financial measures reconcile conciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at Mec, Inc. Dot com.
Joining me on the call today is Bob Kamphaus, Chairman, President and Chief Executive Officer, Todd Butz, Chief Financial Officer, and Ryan Raber E V. P of strategy sales and marketing first Bob will provide an overview of outperformance there.
And Todd will review, our financial results and guidance Bob. Please go ahead.
Thank you Nathan good morning, everyone.
And as we look back at 2020, we're pleased to other way we responded to the pandemic challenges we face.
Not only did we effectively adapt our operations to continue working throughout the year to support our customers. We were still able to focus on optimizing our cost structure through facility and process improvement and strengthen our financial position.
I give credit to our leadership groups throughout the company and for being creative and quickly formulating improvement plans and our entire team for their resilience and diligently implementing those plans and continually adapting to the changing environment.
Agility adaptability and realignment our strengths of our business culture of Mac.
The fourth quarter provided a positive out and to a challenging year and short we did exactly what we told you we would do last quarter all things considered we're pleased with our performance for the quarter and our progress for the year, we continue to maximize the efficiency of our manufacturing operations and we are seeing.
And the positive impact of these initiatives and our results for.
For the fourth quarter of 2020, we delivered net sales of $95 3 million slightly lower than fourth quarter 2019, but a sequential increase from the third quarter of 2020.
Most importantly, we produced adjusted EBITDA and adjusted EBITDA margin of $9 3 million and nine eight per cent for the fourth quarter, respectively. Both of which are significantly higher than the same period last year. As we are now more efficient and have reacted to the changes that occurred.
And 2019.
During 2020, we realized significant improvements and our operational efficiency and three main ways for.
First by capturing full year benefits from the acquisition of <unk>, which is now fully integrated into our organization and producing the expected synergies second by realizing efficiencies from our ongoing investments and technology and automation.
Third from the consolidation of Greenwood, South Carolina facility during the second and third quarter of last year.
Executing this project successfully reduced our footprint and overhead cost, while maintaining our operating and manufacturing capacity and that was all completed on time and on budget without missing a beat with our customers' overall, we saw a strong recovery following the second quarter and.
Ended the year on a positive note.
Now I'd like to provide commentary regarding what we are seeing across the diverse.
And markets, we serve last year, we provided our outlook by market to give a sense for our anticipated and breakdown of business for the year.
Given that 2020 was such an unusual year and this information is meant to be directional comparing 'twenty one to 'twenty will have little value.
Therefore, we're providing our thoughts on 2021 basis only for.
We anticipate the commercial vehicle market will comprise approximately 35% to 39% of net sales.
The construction and access market is expected to represent approximately 17% to 21% of sales.
Our sports is expected to account for 18% to 22% of our net sales.
We expect the agriculture markets to contribute 7% to 11% of net sales.
The military market will comprise approximately 5% to 9% of net sales and.
And finally, we expect the remaining 6% to 10% or 21 sales to be attributed to other markets we serve.
And our commercial vehicles market the near term looks a lot brighter than it did a year ago as we exit 2020 trough our orders during the quarter were in line with our expectations and we anticipate that the market will remain solid and the near term given the continued strength of carrier profitability driving industry.
New truck orders and a growing backlog, we continue to monitor build rates at our customers closely paying attention to potential supply chain constraints that could impact our volume at some points in 2020 one.
At the moment.
Our sports Mark and appears to be maintaining its positive momentum.
Outdoor recreation is expected to be a priority for consumers again in 2021.
We continue to believe that this is an area of relative strength and the near term as customers work to rebuild their dealer inventories and satisfy customer retail demand.
And the construction and access and markets, we see positive signs and residential construction.
[noise] uncertainty exists and nonresidential and oil and gas markets.
We believe that customer Destocking was completed in 2020, and we are positioned to respond well to any changes and retail demand going forward.
The AG market looks positive today, and the market dynamics of increasing crop prices and lower crop inventories that we've seen recently bodes well for this market and the future.
Finally, our military segment has continued to be a steady market for us and we expect it to be and ongoing source of strength for the foreseeable future.
As a reminder, we have maintained or expanded all of our contracts or customer relationships and expect our volumes will return in conjunction with our customers.
Of course for constantly building relationships and looking for new opportunities to expand both our customer base and the markets we serve.
Today, we see opportunities for new projects and takeover business for example, and the fourth quarter, we continued to cross sell products and expand market share across multiple product lines for one of our important commercial vehicle customers as they launch their new models of trucks. This year, you will see our product development.
And then efforts continue to provide organic growth on this business.
And the construction market, we were able to expand our relationship with one of our key customers that continues to successfully expand their product line.
Through our consistent performance and broad capabilities, we continue to grow with them as they expand their market share through their product line expansions.
The power sports market continues to be very active with new awards for future model year updates from one client and we've continued to build relationships with new customers and this market that will lead to new opportunities and 2021 and beyond.
And the military market, our customers look to sell their vehicles and international markets. We are seeing new products to grow our market share while also gaining additional volume above historical levels.
Overall, the pipeline of new opportunities remains robust with numerous new products projects and markets being actively pursued which continues to build our excitement within our organization about the potential opportunities for 2020, one and beyond.
As far as capital allocation priorities are concerned and addition to investing and the business deepening current relationships and pursuing new ones and we remain open to strategic acquisition opportunities, which will help us achieve long term growth.
We are seeing some M&A opportunities, although the market still remains relatively quiet given.
Given the strength of our balance sheet, we are and a strong position to pursue the right deal at the right time that we'll expand and diversify our product offering opened new industries and introduced new blue chip customers and markets.
As we look back at 2020. It clearly didn't turn out to be the ear anyone expected at the start of the year. We were presented with challenges no. One has faced before me and included and I'm proud to say I'm very pleased with how our team responded we controlled costs effectively as volumes dropped and we switched.
Gears and implemented the Greenwood consolidation, we pursued new business and ensure we were doing everything possible to liberty to deliver for our customers and our shareholders.
Although the outlook for the economy is better today than it was six months ago we.
We will still face external headwinds in particular, the market is experiencing raw material and component shortages for many Oems, which runs the gamut from steel to computer chips. This could translate into delays for our customers, which in turn could impact our volumes were closely.
And monitoring the trends and we will provide updates as soon as we can.
However, with conditions generally stabilizing in recent quarters and showing some signs of improvement we are positive about our future prospects and are focused on three things execution execution execution. It will take a bit of time to return to pre pandemic volume levels, but we are.
Well positioned for the future and poised to expand our market leading position.
I would also like to mention that back in December we made some changes to our board of directors first current director Craig Johnson indicated and he will not seek reelection and would retire from the board at the end of his current term expiring at the upcoming 2021 and annual meeting of shareholders.
We have all been very fortunate to have Craig serve on our board for the past 14 years. Our company has grown tremendously during his tenure and his expertise has been and invaluable resource for Mac through times of growth and change on a personal note I want to extend my gratitude to Craig for his counsel and support.
And over the years, we all wish him the very best for his retirement and 2021.
Second our board elected Jennifer can say as a director of the company.
With over 20 years of broad business and leadership experience, including managing multiple functions at a public company. Jenny is an excellent addition to our board as a new independent director and addition to our extensive legal compliance and human resources and experience, we look forward to gaining her.
It is on diverse areas such as change management.
Development, and legal and compliance risk management.
<unk> currently serves as executive Vice President of Administration General Counsel and Secretary at Quad Graphics' worldwide marketing partner with a strong reputation and print where she oversees a broad range of corporate functions, including legal and compliance human resources corporate communications.
Government Affairs, real estate and safety and environmental management.
Finally, before handing the call to Todd I, just want to mention that we remain vigilant when it comes to COVID-19 pandemic.
I'm pleased to report that we have not seen any major impact on our operations and recent months and quite frankly throughout the time that this has been in existence and.
I want to commend our employees for taking the right precautions at work and making the right decisions if they feel unwell to ensure they didn't pass the virus and coworkers.
As this pandemic stretches on we will not get complacent with our procedures and expect to keep operating effectively and efficiently and the months ahead.
And I'll hand, it over to Todd to discuss our financials.
Thanks, Bob I'll begin with the highlights of our full year financial performance and then discuss our fourth quarter before providing commentary on our balance sheet liquidity and our thoughts on guidance.
As noted in our press release, we recorded full year, 2020 net sales of $357 6 million as compared to $519 7 million for the same prior year period, a decrease of 31, 2%.
Client was driven by volume reductions related to destocking activities and market demand changes, mostly driven by the pandemic.
<unk> for lower volumes, all customer relationships and manufacturing programs remain intact.
Adjusted EBITDA and adjusted EBITDA margin per cent for the full year 2020 finished at $32 8 million and 92% as compared to $54 7 million and 10, 5% for 2019, resulting in a decremental margin of 13, 5% as compared to our historical average of 17 and a half.
The improved decremental margin percentage is attributable to our effective implementation of cost reduction activities, including the Greenwood, South Carolina closure and full year of BNP synergies and leveraging our recent investments and new technologies and automation and.
It is important and all that these cost adjustments are permanent and providing a clear path and a 15% adjusted EBITDA margin expectation when manufacturing volumes return to pre pandemic levels in the coming years.
Despite the challenges posed by the pandemic, we generated strong cash flow, resulting in significant debt paydown of approximately $28 million, resulting in an ending debt balance of $47 $9 million and your leverage ratio of approximately one five times as of yearend.
Now I'll provide guidance on the on the financial performance for the fourth quarter.
We recorded fourth quarter net sales of $95 3 million as compared to $102 3 million for the same prior year period, a decrease of six 8%. The decline is due to the market related manufacturing volume reductions again, mostly driven by the pandemic.
Manufacturing margins were $11 million for the fourth quarter of 2020 as compared to $4 million for the same prior year period and increase of 174% prior.
Prior year manufacturing margins were adversely impacted by sudden declines and market demand customer late labor Union issues and Destocking activities resulted in an unusually high amount of under absorbed manufacturing expenses during the period.
Current year manufacturing margin exemplify the impact of leveraging our recent investments and new technology and automation and <unk>.
And implementing permanent cost reduction initiatives, including the closure and consolidation of the Greenwood, South Carolina plant and synergies from the <unk> acquisition.
Manufacturing margin percentages were 11, 6% for the fourth quarter of 2020 as compared to three 9% for the three months ended December 31 2019.
And increase of 770 basis points, resulting in an incremental margin percent well in excess of 100%.
As compared to our historical average of 22.5%.
This positive comparison was driven by the effective implementation of the aforementioned permanent cost reduction initiatives and labor efficiency gains driven by our investments and automation.
Based on these improvements manufacturing margin percentages are expected to improve beyond historical averages when volumes return to pre pandemic levels and the coming years.
Profit sharing bonuses and deferred compensation expenses were $3 4 million for the fourth quarter of 2020.
As compared to two point.
Point $2 million of income for the same prior year period and increase of $3 6 million the increase and the current period expenses, mainly due to the reestablishment of discretionary employer for one K contributions as well as some discretionary bonuses that had been eliminated and the second quarter of 2020 due to pandemic uncertainty.
Other selling general and administrative expenses were $4 4 million for the fourth quarter of 2020 as compared to $5 2 million and for the same prior year period, which included <unk> $5 million and one time IPO and BMP acquisition related expenses, excluding the one time charges from last year. These expenses decreased <unk> 3 million.
And due to the synergies achieved through the integration of DNP lower travel expenses due to the pandemic and other cost savings initiatives.
Interest expense was <unk> 6 million for the fourth quarter of 2020 as compared to <unk> 9 million for the same prior year period for <unk>.
And $3 million decline is due to our lower debt levels and lower interest rates this quarter as compared to 2019.
Income tax benefit was $1 million and $2 $1 billion for free for the three and 12 months ended December 31, 2020, respectively with an annual effective tax rate of approximately 23%.
Our federal net operating loss carryforward and was approximately $12 million as of year end, which was driven by pre tax losses losses caused by the aforementioned volume reductions and 2020 and the one time IPO and DNP acquisition related expenses and 2019 and.
And well does not expire and will be used to offset future pre tax earnings.
We continue to anticipate our long term effective tax rate to be approximately 26% based on current tax regulations.
Adjusted EBITDA and adjusted EBITDA margin were $9 3 million and nine 8% for the fourth quarter of 2020 as compared to $5 5 million and five 4% and for the same prior year period.
Increases are directly attributable to our permanent cost reduction initiatives, leveraging recent investments and new technology and automation and short term adjustments to realign the business due to the aforementioned volume declines.
Again these cost adjustments are permanent and provided a clear path for our 15% adjusted EBITDA margin goal when volumes return to pre pandemic levels in the coming years.
Now I'll, let me address our balance sheet and liquidity figures.
As previously mentioned, despite a very challenging first half of the year due to the pandemic. We are very pleased with our result, and ability to generate cash flow, which directly resulted and debt reduction of approximately $28 million and 2020 with total funded debt of $47 9 million at year end, which equates to a leverage ratio of approximately one day.
At times.
Capital expenditures were $7 8 million for the 12 months ended December 31, 2020 as compared to $25 8 million for the same prior year period, a decrease of $18 million. The decline was driven by 2019 investment cycle that focus heavily on investments and new technology and automation versus more of a focus on leveraging those.
Assets investments and 2020.
And the normal course of business business, we continue to expect our annual Capex to average approximately $20 million per year, which is a combination of maintenance capital along with continued investment and new technology and automation.
As previously disclosed discussed we amended our credit agreement at the end of the second quarter of 2020 and order to provide an added level of insurance against future macroeconomic events.
<unk> remained focused on serving our customers and managing our business.
The amendment increased the maximum leverage ratio from three five times to four to five times throughout the fourth quarter of 2020 and will adjust each quarter thereafter until returning to your original three to five times and the fourth quarter of 2021.
Now I'd like to briefly discuss our outlook for 2021.
As noted in our press release and based on the continuation of the Covid pandemic, which is driving near term labor and material availability concerns and consistent with most of our top customers. We are not providing any specific quantitative financial outlook. At this time. However, we believe that we should be able to build and improve upon our second half FY 'twenty.
<unk> during 2021 with fairly consistent performance throughout the year at.
At this time, we believe our 2021 results will exceed our 2020 performance, but not returned to pre pandemic levels.
Generally we see our numbers in line with current consensus consensus estimate.
With that said I will turn the call back over to Bob for closing remarks.
Thank you Todd.
We're pleased with our recent results and the progress we were able to make during the difficult year, while not back to pre pandemic levels. As Todd mentioned, we are seeing volumes improve across many customers and end markets and most of the commentary from our customers about the future is positive.
And the fourth quarter, we did exactly what we said we would do and I'm pleased we're able to end the year on and I know it.
Assuming the economy continues to stabilize.
And improve we are bullish about our prospects and 'twenty 'twenty, one and beyond as we pursue further productivity gains through new technologies, and automation and explore important internal and external growth opportunities.
On behalf of the board and our management team I want to thank each and every Mac and employee shareholder for the dedication. They have shown during very trying circumstances over the past year, we continue to be vigilant regarding the pandemic and believe our employees are now used to operating with visa restrictions and.
And place despite the disruption there persistence and consistent strong performance has ensured we have maintained all of our customer relationships and manufacturing programs and.
And now our and are positioned to respond as customers ask us to ramp up volumes.
With our current business as well as opportunities on the horizon, we are well positioned to drive growth and the years ahead.
With that said, operator, and we'd like to open up the call for questions.
Well now begin the question and answer session pass for the question you May Press Star then one on your Touchtone phone.
For using a speakerphone, please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
We will pause momentarily to assemble the roster.
First question comes from Mig <unk> of Baird. Please go ahead.
Hello, and thank you and good morning, everyone.
Morning, Mike.
Ed.
Uh huh.
Thank you for the ranges that you've given us by by end market in terms of in terms of your mix for 'twenty one.
Just a quick question on 2020 can you can you give us a sense for commercial vehicles, how much debt contributed to your to your revenue and 2020.
Yeah that was in the 33% rate day range I think right around 33.
Okay. Thank you for that.
And and you referenced consensus sort of be and generally in line with kind of how you're thinking about.
2021 at this point.
Yeah.
For 2021 is likely to be.
Year on good volume growth, so I guess.
My question is as Youre sort of looking at your.
Operations currently.
And what is what do you see as your ability to be able to beat that debt higher demand do you see any challenges ramping up production.
Either related to your own operations or.
Your own supply chain and in this regard.
Sure I'll take the comment about supply chain first and I guess.
There has been some steel shortages and the marketplace that we're aware of obviously steel pricing has increased significantly.
Most of our contracts are pass through on the material cost on the availability side, we've actually done very well and probably better than most so.
We've worked very hard at that all the time.
And inspires and there are some very modest imports that come into our product before we ship it and we're working on those things as well.
And almost immaterial to talk about.
On the internal side.
For the equipment and investments that we've made.
That helps mute some of the people requirements that otherwise would have to be taking place.
And they'll have and it's.
<unk> pockets, it's different locations different geography, and geographies have different challenges, but again I think our investment and automation is showing that that we did the right thing and we will continue to do the right thing with those.
Investments.
So you.
We wont be without challenges, but I think we're we're continuing to work at minimizing them.
Okay.
It sounds to me and I don't want to put words in your mouth here, but it sounds to me that you're fairly confident that youre going to be able to essentially keep up with customer demand in 2021.
And I suspect that not all your competitors are going to be able to do that and even your own customers. The ones that are that are.
And having.
Internal fabrication operations and whatnot are probably going to struggle to some extent ramping up.
As you look back at the prior industrial.
Downturn and or recession.
Is there an argument to be made debt you will be able to gain some share or incremental business.
Given your ability to do due to ramp your own production higher and hopefully take some share that way what day.
<unk> talked to you in this regard.
I think our history is one thing, but we were less automated at those times.
And hopefully with our with our additional automation, we have more leverage potential there.
But we're going to be very careful about it we want it.
Look at debt Opportunistically.
And.
It's not just about share its about profitable share.
So that's what we're.
Just on and.
And doing the right things overall for the business.
I see.
And that's actually a good segue.
And my second line of questioning which is surrounding margin.
You talked about the backlog.
Raw material costs are generally a pass through but I know that some of this is embedded in your and your own business right. I mean, if I'm thinking about consumables on the welding side and that's something that you have to deal with with that I'll presume and its not something easily passed through to the customer. So how do you think about the.
The impact of that on your on your financial model and 2021.
Should we expect you to adjust pricing accordingly, and do you think you can beat it.
And these new tool from a price cost perspective.
We're working hard at doing that I guess.
When we looked at things like automation and actually some of the equipment is more energy efficient.
For the consumables that go through a worldwide well gas things like that.
You're using equal amounts as you would and a less automated situation.
So we and we also have.
Continuous improvement activities by site that we manage.
And kind of on a corporate wide basis, so that we're sharing best practices and best ideas between locations.
No.
That's a prime focus and we've worked hard at or our hope is to be able if you know if we have some crazy increases and those things that go into overhead or perishables.
We'll probably see a little bit of diminishment, but on the flip side is as we look at our operating or our backlog of work if things perhaps need to be adjusted upwards.
Some of those discussions with our customers.
I see and then last question for me.
You talked about the 15% margin goal and and reiterated that you are confident.
And on reaching that.
And I'm sort of curious as to how you were thinking about.
Manufacturing.
Margin and what's embedded within within that outlook.
And if my memory serves me right. Your prior peak manufacturing margin was right around or right under 15, I should say so within that framework should we expect net figure it to be to be higher than it's been in the past.
And.
Yeah.
As you think about 2021 based on the discussion that we just had.
Should we think about manufacturing margin and 21. Thank you.
And maybe this is Todd.
Yes, definitely and as I stated in the script was we.
We do expect when we get it back to let's call. It normalize on a pre pandemic levels of debt manufacturing margin percentage will be above historical averages. So when you think of the peak last P. P and around 15% getting back to pre pandemic levels, we would expect that to be north of that percentage and probably a net I would say 16 to 18 percentage.
Range.
But certainly we think a 'twenty one I expect it to be improved from 2020, but again, what and when you think there would be under under applied overhead because of lesser volumes compared to 2019, it's not going to get back to that I would say, 15%. This year, but again once we started getting to leverage our investments and our overhead with prepay.
Downtick level volume, we do expect that to be north of the 15% and and we achieved that 15% adjusted EBITDA margin.
Thank you I appreciate it.
Yeah.
Thank you next question from Andy Kaplowitz Citigroup. Please go ahead and.
Got it and Andy.
Good morning.
Maybe I could ask Migs question, one other way on the margins you guys have set and the past that you know given the cost out and footprint consolidation that you've done and that you might be able to average high 20% Incrementals.
Sales recover is that possible and 21 I know you said, you're comfortable with consensus, but obviously, there's price versus cost and and all that kind of stuff and you just talked about so is that possible and 'twenty one.
Yeah. The 22 five per cent is our historical average and we do believe that's still achievable in 2021 and now you won't see the 30 and 40 and you don't even have 100% type incremental that you saw when you compare it to two.
2020, and some of the 2019 for quarter, but we will still be above the 22 five per cent and.
My mind for the cost reductions we've made.
Got it that's helpful and then Bob maybe just for a little more clarity maybe it's hard to answer this and also so.
So if we look back at Q4, I mean, you talked about not yet reaching pre pandemic levels and 21, but if we look back at 2020 in Q4, I would assume some of the businesses and markets already above pre pandemic levels, given you're only down 6% or whatever it was and you know power sports is on.
And relatively obvious maybe military but you know any sort of more current commentary on the end markets themselves and sort of what's already sort of recovered if you may versus what's not recovered share.
Sure well when we say pre pandemic. There's couple of definitions 2019 was one year and pre pandemic says kind of first quarter of last year, obviously, the commercial vehicle market was in a downturn.
Going into 2020 and.
His since bottomed and is coming back so that one we've seen that.
Begin on the third quarter and and strengthen in the fourth and we think.
We will continue to improve throughout a.
'twenty one.
So that's what we're talking about is that's one example of what we're talking about when we say pre pandemic.
Other markets Likewise, we've seen the inventory destocking.
Become complete during our during the second quarter third quarter period of time and those markets have bounced back.
So and on.
And when it comes to the.
Recreational products, obviously, they were not essential manufacturers so they get their inventory during the during the second and third quarter, and and our replacing inventory and trying.
Trying to keep up with demand so.
Everything has been moving pretty much and a very positive direction.
So that's I guess the color I can put around that.
And Bob maybe just following on that like in terms of restocking you know power sports sure you know and and you said and maybe that sort of levels off at some point in 'twenty one.
Is that still your thinking and then you know for and markets like small AG for example, and there was destocking and that seemed to and do you think then any markets will really need and restocking in 'twenty one besides power sports.
No.
I guess I'm going to ask Ryan if he has a more pools impression on that one, but I guess I'll start by saying it.
We would agree that there will come a point where our.
Inventory is restocked and the recreational side.
And then the other markets I guess you have some comments and I guess, you mentioned small lag and and definitely there was a quick depletion of inventory and kind of in the middle of 2020.
That has led to a little bit of restocking. There. We would also see it a little bit and and the construction market as Bob noted and in his remarks on the housing market has been strong we've seen a lot of the rental company use increase capex year over year and and in certain pockets of equipment.
Type particular to more of the housing sector. There is a little bit of restocking activity, that's taken place there and the construction market.
Thanks for that Ryan and then maybe one more from me and can you give us an update on and where you are in terms of acquiring new customers and entering new verticals I know you talked about it a little bit Bob on the prepared remarks, but you've been talking about opportunity is in the past like warehousing packaging. So how are you thinking about you know new potential business contribution to 'twenty.
And I know, it's sort of and the other segment, but you know anything that really excite two and 21 and beyond.
Well I guess, we will be able to talk about it more when they occur.
And if they occur but we're.
We're pretty positive about the opportunity and the potential out there Andy and.
So I think that's my my comment on that if and when we can reported we will reported.
And Bob are you seeing any evidence of existing customers re shoring at all or maybe are pushing outsourcing more.
And that and that's part of that story and the up and creates those kind of opportunities. So absolutely that's part of our part of the.
Piece behind that.
Great. Thanks, guys.
Youre welcome.
Again, if you have a question. Please press Star then one.
Pause momentarily to assemble the roster.
The next question comes from Stephen Volkmann of Jefferies. Please go ahead.
Yes.
Hey, guys good morning.
And this is Raj on for Steve.
And just had a quick question on any temporary costs coming back and 21, and just probably the cadence on that I know you mentioned that travel expense.
And related expenses were down.
And this year.
Any guidance on what we can expect in 2021.
I guess on on those topics there'll be.
We do expect.
And <unk>.
And some employee benefits retirement benefits to return to a more normalized level last year as Todd mentioned about the fourth quarter, we kind of refill the bucket and the fourth quarter to make.
A full almost full contribution to the for one gauge for our employees, we anticipate that that will be at a full level and the two.
2021, which will make those dollars higher.
Along with the expect expectation on other incentives on the costs for travel et cetera.
And we've all learned a lot this past year about how to conserve cost how to save time and it's not just in the on the factory floor, but on the front office and.
And we will be monitoring that carefully and I don't see those types of spendings for travel and entertainment and such are hotels, and and meals increase to the 2019 levels.
Probably sneak up a little bit from 2020.
But.
I think we all learned some new things this past year, and and we're going to take advantage of that to use our time more effectively.
That's helpful. Thank you.
Youre welcome.
Thank you next is a follow up question from Mcdole, Brian <unk>. Please go ahead.
Yeah. Thanks for taking the follow up just a quick one.
Bob you talked about the M&A environment and.
I think I heard you say that it was it was kind of slow.
So I guess.
My question is I know than before the pandemic hit you guys had.
And pretty active and fairly full pipeline and you're operating obviously and a very fragmented industry.
What are the puts and takes here in terms of when some of these deals would become maybe available and you'd start converting on that and then I'm also kind of wondering if now that we've been through this sort of big shock if your own thinking in terms of the things that you'd like to add to your portfolio changed.
Right I mean, if youre, either looking for sort of new geographies around the country or new verticals that you might not have examined before or even sort of new manufacturing capabilities that extend beyond the core of what mayville engineering, it's been known for.
Mhm.
And I guess, maybe on the I'll.
I'll take a couple of pieces here.
Prospects that we had.
And are still there and some of them have retrenched.
And are waiting for a better day to present themselves for sale I think that's both from a pay standpoint and from a private owner standpoint.
But we still have those contacts and and.
It just doesn't seem as robust today as it had been.
I think that will change over time.
As people figure out the the end of Covid and all the other risks and.
And issues that are out there.
With regard to what we're looking for our definition is still the same.
And product line expansion and product line extension geographic expansion and then looking for new markets serve so now.
Tween doing that through M&A or through internal growth, if we can do it.
And a and a meaningful way with the internal growth it seems like a more cost effective way to do it.
And realized try to prioritize the best return opportunities and and and achieve all of those our investment criteria.
Criteria and.
And so it can be both.
Mhm.
Well, if if opportunities don't avail themselves to you.
Based on just my own modeling and it looks to me like your leverage ratio, we will exit 2021 close to close to zero.
And I'm wondering if that's the case at that point.
Would you consider some form of returning capital to your to your shareholders either yeah, I did a special dividend or something like that yes.
So we've got we've got three things that we invest and one is we have we still have some more internal ROI opportunities to help us be even less dependent on on people by doing a redeploy of automation and secondly, we have internal growth opportunities.
On <unk> and as we address those that will be with as much automation as possible and then thirdly would be M&A opportunities that will be another use of cash. So all three of those things will be going on and this year and.
And the mix today I can't sit here and tell you what that's going to be but.
I don't think our balance sheet will be debt free at the end of the year.
And there's opportunities for growth on and we're going after that.
Alright fair enough. Thank you guys.
Thanks Meg.
Yeah.
Thank you and next question's from chip Rewey from where we asset management. Please go ahead.
Good morning, guys.
And there's a couple of questions more one on one type stuff for you I understand you have the raw material pass through but especially with steel popping.
Wondered if there is a lag on those contracts, where it's a 90 day lag or anything like that and.
And I guess I'll just ask for and you can dig into these last two as deeply as you want on the call on.
On the on the construction side can you just break out topline rajeev versus commercial and.
And on the commercial vehicle again are you and the engine or even the tractor and the trailer and for that market specifically.
How much for.
Word visibility do you have do you do you see to short term or do you can you see and longer term six to nine to 12 months and I really appreciate it.
I'm going to ask Ryan Raber to address those more detail yeah. The the commercial vehicles, mainly heavy duty and.
And medium duty truck not really much trailer.
And there obviously, we have long range forecast, we use from industry publications, but.
And generally three to 12 months visibility from from the customers on the construction market, we don't really.
Have any topline breakout, we do buy and hold.
Say the Subsectors so nothing to note there.
Could you remind me your first question.
But you ask.
Sure just on the raw material pass through for you guys have a 30 day 60 day 90 day lag that we ought to just think about it.
Yeah, all of those tend to be a little bit different based on who the customer is we have some that are kind of more real time, where youre looking at on a monthly theres others that look at quarterly so it really depends on which customer of age kind of run their own individual program are consistent over time so.
And if there is you know when he lead lag and that always kind of works its way out as you go up and.
And down through the cycles.
Very modest risk on that topic.
Or I should say.
This concludes our question and answer session and I'd like to turn the conference back over to Mr. Bob <unk> for closing remarks. Thank you.
Thank you all and thank you for your time today and your continued interest and Mac, we look forward to talking with you at conferences.
Other there in person or a electronic and road shows throughout the year. Thanks again for your time and interest.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.