Q1 2021 Mayville Engineering Company Inc Earnings Call
Good day and welcome to the Mayville Engineering Company first quarter 2021 earnings Conference call all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Nathan Elwell Investor Relations. Please go ahead.
Thank you well.
Welcome everyone and thank you for joining us on today's call a few quick items before we begin.
Please note that some of the information that you will hear during this call will consist of forward looking statements within the meaning of section 21, eight and the Securities Exchange Act of 1934 as amended.
Statements Express our expectations anticipations beliefs estimates intentions plans and forecasts.
Because these forward looking statements involve risks assumptions and uncertainties, our actual results could differ materially from those and the forward looking sales.
For more information regarding such risks and uncertainties. Please see our filings with the Securities and Exchange Commission, including on filing on form 10-K for the period ended December 31, 2020.
We assume no obligation and do not intend to update any such forward looking statements, except as required by federal Securities laws.
Second this Goldman and bulk description of certain non-GAAP financial measures reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available on Mac, Inc. Dot com.
Joining me on the call today is Bob <unk>, Chairman, President and Chief Executive Officer, Tom Burns, Chief Financial Officer, and Ryan Raber EVP of strategy sales and marketing.
First Bob will provide an overview of on performance and Todd will review, our financial results and guidance with that I'll turn the call off to Bob. Please go ahead.
Thank you Nathan good morning, everyone.
The first quarter and I'll complete I'm pleased to report that we sustained our positive momentum from the second half of last year into 2020 one and.
When you compare where we are now compared to a year ago. The difference is amazing we're proud of the resolve and commitment and determination that everybody in our organization has displayed during these trying times.
Of course, the health and safety of our work force remains our top priority and we remain committed to the highest level of safety for our employees.
Talk about the financials.
We delivered strong financial results during the first quarter generating net sales of 112 $6 million adjusted EBITDA of 13 million and operating income of $4 1 million, we improved on both the top and bottom line compared to last year when the pandemic started.
To impact us in mid March 2020.
And our team began on countering some exceptional challenges.
Our improved top line performance is primarily a result of our end markets being and a stronger position than they were at this time last year. Our volumes continued to improve after the strong third quarter 2020 recovery and are gradually moving back towards the record levels, we saw and <unk>.
19.
We are optimistic that they will continue to move and the right direction.
Our bottom line improvements are a testament to the hard work to optimize our cost structure over the past year and an 11, 6% adjusted EBITDA margin for the quarter, we saw improvement both on a year over year basis, and on a sequential basis and as volumes continue to improve.
We expect to make progress towards our expected goal of a 15% adjusted EBITDA.
In addition to the benefits from our investments and process improvement automation and technology. We are seeing the cost benefits associated with the closure of our Greenwood South Carolina facility last year. As a reminder, we maintained all of our company wide production capacity despite.
This closure by moving key equipment to other existing rough lines.
As we continue to mature as a public company. We are additionally, seeing process improvements and related reductions and some of the SG&A costs compared to past years that are also helping to improve our profitability.
To put it simply our current businesses and our strong position and we will continue to generate significant cash flow as.
As we progress and to the rest of 2021 and beyond we will continue to invest and process improvements technology and automation to allow additional growth with lower than historic hiring and requirements.
Now I'd like to outline our current thinking on the end markets, we serve which we are in a similar position to the fourth quarter earnings call in early March.
The commercial vehicle market is in a much healthier position today compared to a year ago class eight truck orders throughout North America remain robust matching the order flow that our teams saw through the quarter.
Given that freight demand continues to be strong we believe that the market will remain positive and the near term.
Power sports continues to be a bright spot for our business as the demand for outdoor recreation oriented products remains very strong we anticipate that retail demand will continue to be strong and our customers will continue to rebuild their dealer inventories on the coming quarters to meet that demand.
The construction and access and markets continue to show signs of improvement and residential construction, particularly for equipment that is tied to housing and equipment rental.
Non residential and oil and gas markets have been rather unpredictable recently, we think these areas have stabilized and are starting to show signs of improvement between the potential infrastructure Bill combined with the start of dealer restocking and improving oil prices. We think these maher.
<unk> could start to improve over the coming quarters.
And improving crop prices, coupled with relatively low crop inventories and lead us to be optimistic regarding the AG market and we anticipate that this area will continue to see stable to improving volumes and the near to midterm.
Concluding with our military segment. This market continues to be a stable market for us with our customers, having a solid backlog for U S. Government contracts. Additionally, we are also seeing the potential for increased revenues due to international vehicle sales by these customers.
Throughout all of our end markets, we have maintained great partnerships with our customers during the difficult period over the last 12 months, which which speaks to the quality of the work we produce and the trust we have built with our customers and some cases over many years.
It was encouraging and encouraging start to 2021, but we're still navigating our way through this pandemic and some headwinds remain so far this year, we have observed supply chain disruptions at our customers and some although fairly modest for ourselves and of course.
And this raw material and component shortages and cost increases and everything from steel and lumber to computer chips is not unique to Mac or our industry. These challenges are pervasive and the global economy today, and we're doing everything we can to mitigate the impact and adjust customer pricing.
Accordingly.
While these instances have been manageable for our team we are constantly monitoring the supply chain to make sure that we are the best equipped to deal with future challenges for example, during the first quarter, we did see higher steel prices, which we are able to recover but still have a short term negative impact.
Due to the timing and some customer contracts.
While this was largely offset by higher scrap prices there was a modest negative impact on the first quarter's profitability and we expect to see similar issues on the coming quarter, while costs continued to rise and until costs stabilize.
We also expect some of our customers could see supply chain disruptions caused by others that will have on effect on our volumes, but we believe most of the issues will be manageable and temporary in nature.
In addition, we continue to be impacted by a challenging labor market.
As it stands today the pool of readily available and skilled workers is relatively shallow and issue that has become more pronounced as stimulus checks have been issued and schools remain somewhat closed we are actively working through this challenge with recruiting strategies and HR initiatives as we.
Anticipate that this headwind will continue to linger throughout the rest of the year.
As I mentioned earlier, we are reducing our recruiting needs by investing and process improvements and flexible redeploy of old technology and automation.
Despite these obstacles I am very confident and our teams ability to effectively navigate this dynamic economic climate, especially given all that we've proven as an organization over the past year.
That brings us to the future and the strides we have made to position the company for growth.
As you probably saw last month, we announced and important new strategic relationship with a leading U S. Based fitness company, where we signed a long term agreement to produce key components for their equipment.
We were chosen as their manufacturing partner due to our market leadership broad capabilities and reputation for delivering the best quality reliability and engineering expertise.
Company was looking to further augment its U S based production capabilities, and particularly appreciated our unique capabilities and unmatched dependability.
So 2021 is going to be an investment year for this new business and addition to our base business Capex plan, we will be investing between 35, and and $45 million, primarily focused on automation and technology.
We expect to qualify equipment and processes throughout the remainder of 2021 with production scheduled to start in early 2022.
While there.
We will not be a revenue impact in 2021 based on current plans. This customer is expected to become a top 10 customer and 2022.
This is clearly an important new customer and new market for Mac and.
And a perfect example of the market diversification that we have highlighted as a long term priority for our business.
This type of product localization for the U S market is something we believe will be a growing trend for both current and potential customers. This venture leverages, our existing manufacturing expertise into new products using our core skills such as cutting forming.
Welding and painting base.
Based on our customers' preferences, we arent and are positioned to provide any more detail about this engagement, including their name, but we look forward to working with a new partner and forging a strong relationship and the years ahead.
In relation to this new partnership we just announced yesterday that we're planning to open a new facility in Michigan to focus on this new customer relation.
Chip preserving our capacities and our base business for our existing customers. The facility will be outfitted with state of the art equipment and will be located and the greater Detroit area, making it ideal for recruiting the appropriate workforce.
We are and the process of selecting the right facility, which will have an approximate 250000 square feet of manufacturing space once up and running we envision having approximately 300 employees working full time at this facility.
We're thankful to the state of Michigan for providing two and a half million dollars and financial incentives to bring this project to their area.
And we're pleased to be expanding our operations and the state of Michigan and to bring new job opportunities to this community.
In addition to this major development, we're constantly building relationships and looking for opportunities to expand both our customer base and the sectors. We serve today, we see opportunities for new projects and takeover business.
For instance, during the first quarter, we continued to expand our market share for one of our important commercial vehicle customers were on the process of ramping up to meet the needs of their new model introduction and continued to be awarded new parts to our collaborative developmental efforts as they expand.
And the offerings of their new trucks.
We have also been able to expand our market share of next generation tactical wheeled vehicles that will be launching over the course of the next couple of years.
In addition to future programs, we are seeing strong activity on current programs and expect further market expansion market.
Market share expansion over the coming quarters.
We continue to be very active and the power sports market, both on new programs with current customers and.
And on programs with potential customers, which we expect to add to our customer list and the coming quarters.
Over the course of the past year, we have also expanded our relationship with a fairly new customer on the material handling market and over the last quarter. We have added new components and are excited to see this relationship continues to grow and e-commerce expands.
Overall, the new business pipeline remains robust with numerous projects being actively pursued we are very excited about all of these new avenues of growth and we will keep you updated on the latest developments over the coming quarters. In addition, we were pleased to be recognized by one of our top customers.
And <unk> with two major on honors recently.
First the 2021 supplier performance Management award, which evaluated our performance and the areas of product development operations and aftermarket support and alignment with Packers key business objectives, as well as recognizing our collaboration and continuous improvement efforts would pass on.
Sure.
Second we also received the 2000 2010 ppm quality award.
We were recognized for meeting Patkars 10 parts per million and quality standard we take pride and the fact that our supply performance helps produce best in class trucks, and we value. The long term strategic partnership that we have built with such an important brand is packer.
Moving on to capital allocation, we have had a strong balance sheet for quite some time.
And over the past year, we have done a great job of reducing our debt load, even further and creating an even stronger balance sheet.
We have the flexibility to not only make the appropriate investments and projects that help improve efficiency and drive internal growth, but to also consider other investment opportunities.
Of course, we maintain a close eye on the broader landscape for potential M&A opportunities and recent months. The deal pipeline has significantly improved and has rebounded from the pandemic driven slowdown last year.
As always we will diligently analyzed potential targets that could allow our organization to enter new geographies, new end markets, new products and develop new relationships with other potential blue chip customers above all else strategic value and valley.
<unk> will remain top of our mind when we review these opportunities and we look forward to pursuing intriguing deals and the months and years ahead.
All in all we are pleased with the progress we made during the first quarter, including addressing rapid cost changes potential raw material and supply shortages and work force availability challenges, while investing and our future through process improvement automation and technology.
At the same time, we secured a new long term contract with a strategic blue chip customer and a new market and remain encouraged by the overall trends that we're seeing and virtually all of our end markets as we move towards the middle of the year, we remain laser focused on execution.
Delivering industry, leading customer service and are fully committed to building upon our market leading position in the coming months.
I'd now like to turn the call to Todd to discuss our financial results and our 2021 outlook.
Thanks, Bob I'll begin with a look at our first quarter financial performance before providing commentary on our balance sheet liquidity and our thoughts on guidance.
As we noted on our press release, we recorded first quarter net sales of $112 6 million as compared to one another and the $8 6 million for the same prior year period.
<unk>, 4% increase was mainly driven by higher sales volume due to stronger market conditions, and 2021 versus the prior year operational shutdown and issues related to the COVID-19, pandemic, which started in March of 2020.
Manufacturing margins were $14 8 million for the first quarter of 2021 as compared to $11 8 million for the same prior year period and increase of approximately 25% the.
The increase was driven by the aforementioned volume increases utilization of investments and new technology, and automation and a permanent reduction and the overhead costs. Following the closure of the Greenwood South Carolina facility.
The euro year over year improvement also relates to pandemic related issues and the last two weeks of the first quarter of 2020, which included customer plant shutdowns and initial COVID-19 related inventory obsolescence and health care provisions.
Manufacturing margin percentages were 13, 1% for the first quarter of 2021.
As compared to 10, 9% for first three months of.
2020, and increase of 220 basis points and line with higher sales volumes and permanent cost reductions associated with our cost optimization initiatives incremental quarter over quarter manufacturing margins were 73, 1%, which were well ahead of historical averages.
Profit sharing bonuses and deferred compensation expenses were $2 9 million for the first quarter of 2020 as compared to $1 3 million from the same prior year period.
The increase was primarily driven by the return of standard discretionary employer 401, K and bonus accruals as business activity return to more normalized levels.
Other selling general and administrative expenses were $4 7 million for the first quarter of 2020 as compared to $5 6 million for the same prior year period.
His expenses decreased <unk> 9 million due to lower public company costs due to process improvements continued DNP integration synergies lower travel and entertainment expenses due to pandemic restrictions and other cost savings initiatives.
Interest expense was <unk> 5 million from the first quarter of 2021 as compared to <unk> eight nine and for the same prior year period. The modest decrease was due to lower borrowings and combined with lower interest rates.
For the first quarter of 2021 income tax expense was $1 million on pre tax income of $3 5 million.
Our federal net operating loss carry forward was approximately $12 million as of quarter, and which was driven by pre tax losses incurred in previous years.
And the NOL 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 was $13 million for the first quarter of 2021 as compared to 11 4 million from the same prior year period and.
Adjusted EBITDA margin percent increased by 110 basis points to 11, 6% in the quarter as compared to 10, 5% for the same prior year period and represented incremental margin of 39, 6% as compared to historical average of 22, 5%.
Now, let me address our capital expenditures and balance sheet and liquidity figures.
Capital expenditures were $5 6 million for the first three months of 2021 at $32 4 million for the same prior year period, the increase which was in line with our 2021 budget was driven by our continued investment and new technology and automation.
Furthermore, as we noted in our recent press release. The addition of our new strategic customer and associated production ramp up will require an additional $35 million to $45 million of capital investment there.
And thereby increasing our full year capital expenditure expectation to be and the range of $55 million to $65 million.
While our historical return on investment for New technology, and automation has been very strong I am pleased to mention that the return on investment for our new strategic customer is similar in nature and has a little less and a three year payback with similar financial characteristics to our base business.
In addition to the capital spending we do expect to incur between three and a half and $5 million of one time launch costs. This year debt will negatively impact our financial performance.
In order to accommodate the increased capital spending this year, we entered into a third amendment to the amended and restated credit agreement on March 31 2021.
By the company is allowed to incur up to $70 billion of capital expenditures during fiscal year 2021, as opposed to $35 million the.
Net debt capacity and maturity date on the credit facility were unaffected by this amendment.
Throughout the past year and in spite of the pandemic related challenges, we have made great strides and Florida fine and our balance sheet by Opportunistically paying down debt. That's the most logical times and I am very pleased with our financial position today.
As we ended the first quarter of 2021 total outstanding debt, which includes bank debt and capital lease obligations was $49 million.
As compared to $90 9 million at the end of the first quarter of 2020.
And nearly $42 million debt reduction resulted in our leverage ratio dropping to one four times based upon a trailing adjusted EBITDA of almost $34 4 million.
Which is much lower than the one eight times for the first quarter of 2020 and significantly lower than our covenant threshold of four times.
Now I'd like to turn to guidance.
With the overall economic outlook becomes clearer and some of our customers and I'll provide a more forward looking information we have decided to provide quantitative guidance for 2021.
Based on our recent performance.
Overall, economic climate, and the broader industry and market trends, we expect net net sales to be between 450 million to $470 million and adjusted EBITDA to be between $46 million and $52 million, which includes the impact of the three 5% to $5 billion of one time launch costs related to our new Mark.
And that expansion.
While we are encouraged with what we're seeing and the broader economic environment I would just like to reiterate that our outlook is based on our end markets remain stable continued material availability and that business activity as a whole continues to trend positively.
As we move into the middle of the year, we remain laser focused on both delivery and improve full year financial performance and working hard on our new growth initiatives.
That said I will turn on the call back over to Bob for closing remarks.
Thank you Todd.
As I stated in my opening remarks, we're in a strong market position today, especially compared to where we stood a year ago.
A lot of business improvements, coupled with a determination to succeed and been accomplished during the past year and I want to take this opportunity to express my gratitude to all of our employee shareholders, including my management team and board of directors.
Thanks to everyone's efforts Mercosur and a much better position today than we were when we first centered the per day.
And then Mike and March of 2020.
It's important to remember however that lingering pandemic.
Coupled with supply chain cost and component shortage related headwinds are likely to impact the overall economy for the rest of 2021.
Despite these changes and challenges, we remain confident and our teams ability and adaptability to navigate through the headwinds and deliver the financial results in line with the outlook, we provided today, including the launch of the New project.
This is an exciting time for our company with our current business and a great position to continue to improve and generate strong cash flow plus the potential for additional growth avenues that are opening up and ahead of us.
Clearly there are further important task to accomplish but this team is prepared and focused and I look forward to sharing more updates with you and the future and and the quarters ahead.
With this said I would like to open up the call for questions operator.
Okay.
We will now be begin question and answer session to ask a question on your press Star then one on your phone.
Using a speakerphone, please pick up your headset or price.
And if any on your question is can address and we'd like to withdraw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from day to operate with R. W. Baird. Please go ahead.
Hey, Good morning, guys, it's Joe Grabowski on for Mig This morning from.
And Joe Joe Good morning, Good morning, I have several questions related to the new fitness customers. So I'll just kind of.
Start there and.
And I guess the first one is three.
And three 5% to $5 1 million of launch expenses, how are those expected to fall per quarter.
Obviously as as this process matures and gain strength.
Likely modest and the second quarter and growing to a.
And the largest piece and the fourth quarter.
Okay, Great. That's helpful and then the <unk>.
Announcement, and you put out yesterday.
Youre talking about several potential facilities and.
Am I to assume you're basically looking at existing sites that arent arent being.
And are you are being used currently that you can move into is that is that the plan.
It would be sites that are available and some of them, maybe newer and some of them may be.
Previously use but they all will be available and the timeframe that we're looking for.
Okay. So we're not talking about Greenfield construction again, we're kind of talking about existing facilities.
Well, maybe and newer facility that is.
Is has is a greenfield, but it's and process already and will be available and when we want it.
Got it Okay and then.
I mean, I guess, just conceptually piece of fitness equipment isn't as large as well.
And our track briefer piece of construction and equipment for example, it seems.
And it just seems to me that a 250000 square foot facility.
And four components to go into fitness equipment and it seems it seems large and are you kind of factoring in.
Additional expansion for that facility or will that 250000 square feet basically.
Sure.
Satisfy the current demand of the contract.
And basically size to the contract remember we also have a lot of automation and this factory. So a very good leverage of the employment base that we that we will need to operate it so.
250000 will get gets you a pretty good revenue level.
Okay. Thank you and then.
You talked about a shallow.
Base right now it's hard to attract new employees are pretty confidence youll be and when they get the factory staffed.
Needed to be.
Yes, that's a that was a key attribute we're looking to and we were.
Doing our site planning and we looked at numerous states and.
This location gave us the best opportunity for that as well as a few other things related relating to costs and.
Energy et cetera.
Great Okay.
Final question.
Assuming that your core end markets continue to progress the way they are right now and then with these incremental sales.
And 22 sales are likely to be at least back to 2019 levels if not above so will this new.
Well its new contract with this new product will be supportive of your 15% EBITDA margin goal.
Most definitely.
Great. Okay. Good to hear thanks, Thanks for taking my questions.
Youre welcome.
Our next question comes from Janney capital.
Wow.
And with Citi. Please go ahead.
Hey, This is this institution on behalf of Andy Kaplowitz Good morning, guys.
Good morning.
And can you give some additional color on your end markets based on your guidance, while <unk> got and not at the pre pandemic level trends, mostly positive can you provide some commentary on what you would consider it.
Worsens, what you think has still not recovered as we think about the remainder of the year.
Sure Ryan you want to take that question, Yeah I think.
Certainly since the third quarter of last year, we've seen the majority of our end markets have a pretty positive too.
Trajectory if you take commercial truck for example, and 2019 was certainly forecasted at higher levels than we are today, but we expect.
The upward trend to continue and as we look into the years 'twenty to 'twenty three.
<unk>.
The goal is to obviously eclipse, where we were in 2019. So the setup is as good as Bob noted in his comments we see.
Certainly strength in commercial vehicle and the construction and access and markets the fundamentals and egg remains strong.
Coming into the year, we weren't sure how long.
Power and power sports would remain at elevated retail levels and the restocking needed and we think that has only gotten stronger.
And so last time, we had spoken and our military market has remained pretty stable. So we continue to see positive signs pretty.
Pretty much everywhere across the business and obviously, the new customer that we're riding will add a new a new market into the mix that we also were very optimistic about.
Got it good to weigh on that and.
And you touch up on your M&A strategy, given the new credit agreement do you think M&A and get pushed out a little as you focus on the new customer and facility and you basically you touched upon this on your and your prepared remarks, but maybe elaborate on the M&A pipeline and that is out there given how the economy is shaping up and markets are you guys.
Focusing on from an amendment.
Okay.
Yeah, well I guess I'll, just say this will be sticking to our investment strategy.
New customers new markets.
<unk>, new geographies and product line expansion and product line extension those are base criteria and.
And it appears that that funnel is filling very quickly.
We obviously want to make sure that things are.
Perfect and and we're spreading out the work load a little bit regarding the launch of the new project as well as M&A, but M&A projects come to you when they want to not necessarily when you want them to our balance sheet is prepared to take it on our team is prepared to take it on and we've tried to.
And keep a few.
Capacities that we can pull on either internally or externally to assist us where needed. So.
We'll take it as it comes and but we still will.
Put that have heavy scrutiny on the strategic.
Strategic part and the valuation of that.
Sounds good thank you I'll pass it along.
Thank you.
Our next question comes from Larry de Maria with William Blair. Please go ahead.
Hi, Thanks, good morning, everybody.
Good morning, Larry Larry Hey, guys.
The first question I just wanted to understand sales.
Sales were up close to 4%.
And most of the Oems are putting up.
Solid double digit sales increases so I'm just kind of curious whats the disconnect between the sales the Oems are putting up 10, 20, 30%, 40% and increases in the first quarter and then you guys increase and.
And then can you also discuss your ability to price because I think it's.
Obviously, it's a mechanism and pass through mechanism. So it shouldn't be a problem with pricing, but can you just kind of help me with those two things.
I think I'm on I asked Ryan that kind of review it a little bit by market, but there are some details there that I think.
Would lead you to R. R.
<unk> results and some of them, depending on where that customer was and the first mark first quarter last year. It might look like a big jump forward to them, but compared to.
Our our revenues I think and I think everything is lined up we have not lost any wallet share if anything we're gaining wallet share so.
I guess.
Ryan do you have a.
And I guess, we were tied in closely to their their build rates Larry. So obviously as they are building trucks tractors combines whatever that may be or floor and through the same way there could be.
Changes in inventory that take place and bolt on and on our side or even and their their end markets with how they are thinking.
Pressure.
Throughout the year, but as Bob noted there hasnt been any wallet share loss and we continue to support the.
Customers and meet the needs of the wind rates of their business and.
In terms of pricing, we obviously are looking at all of the input cost.
Cost of steel.
It has accelerated and went up over the past couple of quarters, we do have agreements with customers.
And the price to cost, but at times those are lagging just and the mechanisms and how those are implemented but.
We do expect.
And over time that that reaches parity points and wont impact the business over the long term.
Okay. That's good I don't know Youre talking about Youre rich on your guide to the production plans.
Talking about the first quarter with sales up three 4%.
Down to offset them and caterpillar comment Cna's. This morning, they'll put up big sales increases and so I just don't understand why you guys were up to three months to 4% something must have offset it.
I'm sure a portion was on our first quarter of last year.
And with COVID-19 and the pandemic sit on and we have multiple weeks of just customer shutdowns were zero shipments were taking place obviously.
And that impacted our year over year and then.
As we look into this year and all I can really say, Larry as we've seen and the growth and.
And why and rates and build rates that they've had and we're aligned well and there is probably some equation on on how they are recognizing their build rates and to what their retail volume is.
And we've seen the growth we don't have any major markets that are really down.
Year over year everything we've seen has shown signs of strength and as we think about it sequentially really going back through the third quarter were matched up really well to what the customers are telling us.
Okay. Thank you and then a quick question regarding the new customer.
If correct from wrong, obviously down a bunch of calls this morning, but you're going to spend up to $45 million on the ramp.
And therefore, and you expect a three year payback, so something like 15, a year $45 million over the next three years, you're going to get back number one is there a ramp to that and is that right. That's what we should expect and and sales would be obviously and the $100 million plus per year with a new customer and secondly, whats.
What's the risk with this customer is if they fail or something happens you on the hook for this or are they sharing the risk with you can you just help us understand that.
I think a couple of points area and our.
Calculation of investment it would be.
Net capex plus the learning curve.
So you would add and the three and a half to $5 million and our way of looking at it so the the return.
Less than three years your math is correct.
Yeah.
And with regard to your other question regarding the risk associated with it.
Rick shared contract that.
Gives us.
And them protection that they need and we need.
Okay, very good and should we be modeling this linear or a ramp over the next few years.
Larry This will really ramp up over the first couple of quarters of next year, So pretty quickly and then by the time, we had really the back half of 'twenty two.
Would be running at and and.
The annualized rate that would continue into the years ahead.
Okay perfect. Thank you very much and good luck.
Thank you.
Again, if you would like to ask a question. Please press Star then one.
Our next question comes from Steven Fisher with UBS. Please go ahead.
Thanks, and good morning, guys.
Good morning.
Good morning, I apologize I got on the call a little bit late so I'm not sure. If you addressed this already but in some prior quarters, you've talked about the potential to have a 15% EBITDA margin.
And when you get to the $500 million sales level, and so you're just shy of that and with expected market growth rate I wonder if that.
Is within a line of sight over the next year or so.
On the top line and if so how confident are you and still being able to to achieve that 15% margin level. Thank you.
Yes.
And you want to answer that one cash.
Great question, and certainly something we're watching very closely and and.
Yes, we feel very confident once we get back to that pre pandemic level that the 15% EBITDA.
Adjusted EBITDA margin expectation is achievable in fact, when you look at this quarter.
There's a little bit day, 12%.
But really if you strip back and you factor in some of the period cost a little bit with the material lagged at Bob spoke to that's kind of a short term impact and then you tack on about 10 and $15 million worth of sales and you get debt absorption.
Fixed overhead we're kind of there today already so it's really hit and had sustained volume bad debt $500 million plus level that we will see the 15% EBIT margin returns.
Okay. So it sounds like that's something we couldn't keep in mind for perhaps 2022.
Definitely.
Yes.
Thank you.
Yes.
This concludes the question and answer session I would like to turn the conference back over to Bob Campo Chairman, President and CEO for any closing remarks.
Thank you for the question and answer session I appreciate everyone's time today and your continued interest and Mac wed.
And we look forward to talking with you and upcoming conferences and Roadshows throughout this year have a great day and glad.
Glad to see everything go on on the right direction.
Thanks for your time today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
And.
And then.
And then.
And.
Yes.
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