Q2 2021 Mayville Engineering Company Inc Earnings Call
While the risks assumptions and uncertainties, our actual results could differ materially from those in the forward looking statements.
The more information regarding such risks and uncertainties. Please see our filings with the Securities Exchange Commission, including our 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 the federal Securities laws.
It's the cobalt with all of the discussion of certain non-GAAP financial measures reckon.
A reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at net income Dot com.
Joining me on the call today is Bob <unk>, Chairman, President and Chief Executive Officer, Todd Butz, Chief Financial Officer, and Ryan Raber EVP of strategy sales and marketing.
Bob will provide an overview of our performance then Todd will review of financial results and guidance with that I'll hand, the call over to Bob. Please go ahead.
Thank you Nathan good morning, everyone.
I am pleased to report that many of the positive trends, we outlined last quarter continued into the second quarter.
Thanks to the diligent efforts of our team we produced net sales of $122 million this quarter virtually double the amount of delivered in the second quarter of 2020 <unk>.
Adjusted EBITDA of $14 million drove operating income of $4.8 million and both tremendously improved compared to the prior year period.
Like many companies the second quarter of 2020 was the toughest part of the pandemic from Mack and as things continue to improve in 2021, we have outperformed on almost every metric on a year over year basis.
Across the board our end markets continue to strengthen and volumes continued to steadily grow as we transition back towards normal working conditions based on the visibility we have today, we remain optimistic about the future.
We finished the quarter with an adjusted EBITDA of 11, 7%, which was well ahead of the prior year and in line with our expectations.
Having said that our bottom line performance has been impacted somewhat by the normal lag in contractual raw material price increases and general inflationary pressures as volumes continue to improve we expect to make further progress towards our goal of 15% adjusted EBITDA.
Margins Todd will cover this in more detail on his remarks.
Going forward, we remain focused on investing in technology and automation to improve our productivity potential and take on the growing demand. We are seeing from our customers, particularly through the launch of business and Hazel Park, Michigan.
It is worth noting the while Covid cases are very low in many of our communities that we operate in we are remaining vigilant regarding the health and safety of our workforce. This is a top priority.
As I already mentioned the end markets, we focus on today continue to have a positive outlook.
The commercial vehicles market is in a much healthier position today compared to a year ago the <unk>.
Last 8 truck backlog remains robust and aligns with the order flow that our team sort through the quarter.
Given that freight demand continues to be strong we believe that the market will remain positive.
Our sports remains strong as the demand for outdoor recreation oriented products remains at elevated levels. We anticipate that retail demand will continue to be strong and our customers will continue to rebuild their dealer inventories in the coming quarters to meet that demand.
The construction of an access end markets continue to show improvement in residential construction, particularly for equipment that is tied to housing and equipment rental.
While the nonresidential and oil and gas markets have not seen a significant recovery yet we think these areas have stabilized and are just starting to show signs of improvement.
Between the infrastructure build combined with the startup of the dealer restocking and rising oil prices. We think better days are ahead in these markets.
On another note improving crop crisis, coupled with relatively low crop inventories lead us to be optimistic and our customers optimistic regarding the AG market and we anticipate that this area will continue to see stable to improving volumes in the near to mid term.
Concluding with our military segment, which 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 vehicle updates being implemented by our customers.
As demand trends continue to be positive supply side, the headwinds continue to be a limiting factor to our customers' growth.
We are seeing varying degrees of supply chain disruption that is impacting our customers, which in turn temporarily impacts of the volumes they need from Mac and we expect these issues to continue for the foreseeable future.
Like the rest of the country, we continue to see inflationary pressure on raw material labor availability and component pricing across the board, which is something every company is currently facing.
Mac has the right mechanisms in place to minimize these impacts on our bottom line on a timely manner, such as contractual raw material price increases that would get passed along to our customers.
Offset by enhanced continued investment in new technologies and automation.
<unk> also continues to work diligently to minimize the potential impact to our customers.
In addition, 1 of our top customers experience Union labor issues during the second and into the third quarter, including of short strike.
While the issue has now been resolved that has been additional disruption to production schedules, which in turn has impacted our volumes as well.
All of those of the supply chain issues are expected to continue they are not getting noticeably worse and we are proactively managing any challenges we face.
While our margins are seeing a temporary impact from the lagging contractual price increases pass through to our customers. We expect to recover these costs in the near term.
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1 other nationwide issue is the ongoing challenging labor market.
Our creative recruiting strategies on HR initiatives are working well the finding skilled employees will continue to be an issue on the second half of the year, which is another reason we are focused on investing in flexible redeploy of old technology and automation.
I wanted to return to the new strategic relationship with a leading U S based fitness company, which we announced last quarter.
Our new client was looking to expand its U S based production capabilities.
And as the largest fabricator in the U S with an unmatched reputation for capability quality and service the naturally partnered with Mac.
With the long term agreement in place, we will spend the second half of the year starting up our operations. So we are ready to begin production of <unk>.
And our end markets.
These trends are set to continue and the second half of this year.
I'd now like to turn the call to Todd to discuss our financial results and more detail Todd.
Thanks, Bob.
Again with a look at our second quarter financial performance before providing commentary on and balance sheet liquidity and guidance.
As we noted on our press release, we recorded second quarter net sales of $122 million.
And as compared to $62.6 million for the same prior year period.
The approximate 92% increase was primarily driven by higher sales volume due to the strengthening market conditions and 2021 versus the prior year and.
In addition, the lack of operational shutdowns and issues related to the COVID-19, pandemic, which impacted our customers most heavily and the second quarter of 2020.
Manufacturing margins were $16.3 million per the second quarter of 2021 as compared to a loss of $1.2 million for the same prior year period and increase of approximately 500%.
The increase was driven by the aforementioned sales volume improvements the utilization of investments and new technology, and automation and the permanent cost reduction and overhead cost and related prior year restructuring and cost of $1.8 million. Following the closure of our Greenwood South Carolina facility.
These improvements were slightly offset by the lag and contractual raw material price increases incurred and the current period, which we expect will be recovered and the near term. Additionally.
Additionally, the company incurred $1 million of the expected 3 and a half to $5.1 million of launch costs related to the new Hazel Park, Michigan facility for a new customer and the fitness equipment market.
Manufacturing margin percentages or 13, 5% for the second quarter of 2021 as compared to a negative 1.8% for the 3 months ended June 32020.
And increase of approximately <unk> 15 on a percent.
In line with the higher sales volumes and permanent cost reductions associated with our cost optimization initiatives incremental quarter over quarter manufacturing margins were 33%.
Profit sharing bonuses and deferred compensation expenses were $3.2 million per second quarter of 2021 and.
$1.2 million and for the same prior year period. The increase was primarily driven by the return on discretionary retirement benefits and bonus accruals as business activity and sales volume continue to move towards pre pandemic levels.
Other selling general and administrative expenses were $5.4 million for the second quarter of 2021 as compared to $4.6 million for the same prior year period.
The increase was due to higher salary and payroll expenses and addition to higher travel and entertainment expenses, which were artificially low and the prior year period due to the COVID-19 pandemic.
Interest expense was <unk> 5 million for the second quarter of 2021 as compared to <unk> 6 million per the same prior year period.
This decrease is due to lower borrowings and the current period and comparable interest rates to the prior year.
So the second quarter of 2021 income tax expense was approximately $1 billion on pretax income of $4.3 million. Our federal net operating loss carry forward was approximately $12 million at quarter, and which was driven by pre tax losses incurred in prior years.
And the NOL does not expire and will be used to offset future tax on it.
We continue to anticipate on long term effective tax rate to be approximately 26% based on current tax regulations.
Adjusted EBITDA was $14 million for the second quarter of 2021, as compared to $2.3 million and for the same prior year period.
And EBITDA margin percent increased by 810 basis points to 11, 7% and the current quarter as compared to 3.6% for the same prior year period and represents an incremental margin of 24%.
Our adjusted EBITDA margin and margin percentages or impacted by the lag and contractual raw material price increases pass along to our customers.
We're moving this effect of the contractual lag our incremental quarter over quarter adjusted EBITDA margin percentage would have been 36% as compared to our historical average of 22, 5%.
And I'll, let me address our capital expenditures balance sheet and liquidity figures.
Capital expenditures were $11.4 million for the second quarter of 2021 as compared to $1.3 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 and $5.3 million and spending to support the production ramp up for our new strategic customer and the fitness equipment market.
Continue to expect our full year capital spend to be and the range of $55 million to $65 million, which includes the 35% to $45 million of investment needed to support the Haynesville Park edition.
As of the end of the second quarter of 2021 total outstanding debt, which includes bank debt and capital lease obligations was $46.2 million.
As compared to $77.5 million at the end of the second quarter of 2020.
The nearly $31.3 million debt reduction resulted in a leverage ratio dropping to 1 times based upon a trailing adjusted EBITDA of only $46.1 million.
Which is substantially lower than the 2.4 times and the second quarter of 2020 and significantly lower and our covenant threshold of 375 times.
Now I'd like to discuss 2021guidance.
Based on our recent performance the overall economic climate and the broader industry.
Industry and market trends, we are slightly modifying our guidance provided last quarter.
Due to the impact of increased material price pass throughs. The company now expects sales to be between $470 million to $490 million up from our previous range of $450 million to $470 million, while adjusted EBITDA is expected to be between $48 million and $52 million, which has narrowed from the 46% to $52 million.
And continues to include the 3.5 to $5.1 million onetime.
And 1 time launch costs related to our expansion and fitness equipment market.
The momentum we have built and the recent quarters appear set to continue and the second half of this year with that said please remember that our outlook assumes our end markets remain stable supply chain constraints do not dramatically worsen and that business activity as a whole continued to trend positively.
In addition, please note that our manufacturing and adjusted EBITDA margin percentages, maybe diluted upwards of 150 basis points due to the impact of contractual raw material price increases that contributed to our top line sales will provide no margin dollars and theyre simply pass through to our customers.
Despite this short term impact we remain confident and our ability to deliver 15% adjusted EBITDA margin when production volumes return to pre pandemic levels.
Finally, we couldnt be more pleased with our current financial health and I'd like to thank everyone on our team for working diligently to ensure we are positioned to succeed going forward.
We are focused on making the right investments and building out the Hazel Park, Michigan facility. So they are ready to ramp up production for our new strategic customer as planned and early 'twenty 2.
With that said I will turn the call back over to Bob for closing remarks.
Thank you Todd.
Thanks to the strong work ethic and focus on safety of Max employee shareholders, we are and a solid position today as our business and the world continues to rebound from the pandemic related downturn last year.
While demand trends are all showing green, we're being limited by the various supply chain people constraints and price inflation that will continue to impact Mac and our customers and the overall economy for the rest of 2021.
We are and navigating through these headwinds and are well positioned over both the near and long term to drive improvements and expand our market leading position.
We are pleased with our results for the first half of the year and our outlook bodes well for the second half of 2020, 1 and beyond.
With this said I would like to open the call for questions operator.
Yes. Thank you at this time, we will begin the question and answer session.
And I ask a question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to trying a question. Please press Star then 2 at this time, we will pause momentarily to assemble the roster.
And the first question comes from Macdill Ray with Baird.
Good morning, and good morning.
Good morning, Thank you for taking the question and for all the helpful detail already provided.
I guess I want to start with.
On the discussion on supply chain and sort of what you're seeing from your customers you highlighted.
Disruptions to their production schedules, which obviously, we've been hearing and Bob.
Background, earning season.
And you don't expect things to get worse, but I'm sort of curious as to.
First is and is there a good way to kind of quantify what the impact.
On your business might have been in the second quarter from these changes and production schedules and then you know.
Do you expect your customers to be able to make up production, either and a third quarter or the fourth quarter.
Sure I.
And I guess on the first question maybe.
And there was a I wont say it was minimal but it was it wasn't that big of an impact on us.
It would've helped certainly on our results for the second quarter had we not faced.
Some of those issues and I think people are been more pleased with our results and they already are.
But on the supply side and and I guess.
What we see happening.
We do think that it is stabilizing and we think there are better days ahead, especially on the employment side and some of the federal assistance goes away on the unemployment benefits and school begins and healthcare or day care for children and schools are open again.
So we're looking forward to better days, there I think.
The worst part is behind us.
So that's the people part on the supply side.
Certainly that helps our other other domestic suppliers and become more.
Capable of fulfilling their obligations to our customers on.
On the import side I think our ports are getting better for bringing product and but they're not where they should be yet so there'll be and im.
Not certain on how that 1 is going to shake out.
From a customer standpoint, I think they are looking forward and.
David will want to be able to make up that volume.
It will depend on these headwinds as to whether there'll be able to do so.
Okay.
And you know.
Updated outlook.
And trying to figure out here is if we should be thinking that.
Revenue here is is up sequentially do you expect normal seasonality into the fourth quarter or sort of how do you have things kind of planned out for the for the rest of the year from a revenue standpoint.
Yeah, I would say we were.
And we're looking at a solid second half.
I think the resources and output that were debt. We've shown we're capable of doing and the first half will continue and maybe modestly up a bit and real output not price adjusted output. So we see our output and improving.
And Theyre being.
Uh huh.
Largely the material cost adjustments going into those revenue increases and and with debt.
Very modest.
Accretion to earnings because of that.
But some.
But you know our.
Our U R.
Are you able to maybe parse out the third versus the fourth quarter I'm just trying to think through how we should be thinking of revenue sequentially here.
If it builds and.
And the third quarter, and and slows down and can afford.
Holiday shutdowns or.
Is there a different way.
You you might be thinking about it.
So maybe when you look at the third and fourth quarters.
Really it builds a little bit because of the price pass throughs that happen and in the third quarter.
And so it really stabilizes and released and look at third and fourth quarters and they're very much very similar from a top line sales perspective other than when you take off the impact and the fourth quarter for the holiday shutdowns and so it really that debt production is very much stabilized and the back half and very consistent.
Understood last question for me.
If I'm looking at your top line guidance and I just.
And make sure that I understand.
$20 million raised how much of that was with the pricing pass through debt.
We're talking about relative versus maybe some of the end markets themselves.
And a little bit different and what you previously expected. Thank you.
Yeah, so on that $20 million lift that we would say about approximately 2 thirds of that was related to price pass through some of it is just strengthening market conditions.
Okay. Thank you and the next question comes from Andrew Kaplowitz with Citi.
Good morning, Hi, This is a time to find their on per Andy good morning.
Good morning based on commodity.
Similar to the new fitness customer have you seen further demand from both old and new customers to localize the supply chain during Q2, and how much runway would you say that a potential re shoring trend has to go.
Yeah, I think we're we continue to see opportunities there obviously.
Supply chain constraints, both domestically and globally caused customers to reevaluate their situations.
I can't really put a number on what that means but I can say, we continue to pursue additional opportunities both on and on an outsource basis domestically and also as you think about.
Re shoring onshoring.
For folks that are using and international supply chain.
That's helpful and you've previously mentioned potential opportunities regarding warehousing and packaging. So what are you seeing in terms of that business potentially contributing to revenue over the coming quarters.
Yeah, I mean, it was a.
I guess, a couple of years and hour or at least a year and a house that we brought on and some new customers and that space, which continue to grow we haven't necessarily highlighted.
Those on our past few calls, but definitely and continue to build strength and the market and they are.
Overall, when we think about the impact of just the change in consumer spending and.
And the good is good for our commercial truck market and when you think about freight movement.
And those all have to sit and cross docks warehouses et cetera, and that's kind of being China. So we feel good about the customers. We have we also see adil.
Additional opportunities and in multiple ways it could be.
The automation within this because the conveyors and and warehouses and <unk>.
To cards and many other other things so we're optimistic for the future.
We'll continue to grow for us.
Thanks, and then 1 last 1 if I can given the impact of lag price realization and ramping launch cost how are you thinking about the cadence of margin in Q3 and Q4.
So margin in Q3, and Q4 will have that same drag effect on and we think the dilution like I stated about 150 basis points compared to our normal sort of run rates. So that is going to have a little bit of a dilutive effect and the second and third and fourth quarters.
We would expect it to be a slightly beneath where we were and second quarter, but again with timing and I think we could improve upon that.
That's helpful. Thank you very much and I'll pass it along.
Yes.
Thank you. Thank you. Thank you and the next question comes from Larry de Maria with William Blair.
Hey, Thanks, good morning, everybody.
Good morning, Larry.
So obviously reiterated your 15% EBIT.
EBIT adjusted EBITDA margin target on on the sales returned to pre pandemic levels, which presumably happens next year just wanted to understand how we go from 11% of show this year to 15% and your confidence and getting to those numbers.
Or.
And just further confidence and hitting those numbers, because that's obviously where expectations are.
Yeah.
Yes, a couple of things and I'll ask Todd to provide some further color perhaps but.
Our margins will be better or direct margins and our overhead absorption will be better with that higher volume. So there shouldn't be 2 factors.
Contributing to that improvement.
It also depends on where raw material prices set.
If raw material prices remain high.
We pass that along but we don't pick up additional margin on that so that that has its own impact on that it's had its impact.
And the second quarter and plus the lag and we.
We will have the same ramifications and.
And the second half.
And so as Bob mentioned, when you think about pre pandemic levels. In 2019, we were at $520 million and we've all talked about that 15% occurring once we reset sort of level of volume and we think of today's material pricing. If you were to push that back and the 19 that would create at about $40 million of additional sales rate with no further.
The bottom line improvement so really its debt production volume when you look at our estimates this year at $4.70 to 490, we're still well beneath our pre pandemic run rate from a production standpoint, when you think of that overhead absorption and net favorable impacts. So this quarter and because of that lag we had a very large step up and material price.
And from Q1 to Q2.
A modest increase in Q3, and the expectation is to stabilize or come down and Q4.
We took the bulk of that kind of margin impact and the second quarter.
And when you compare that back to 2019, we stabilized debt against that short term impact, we're very confident and couple of material pricing stabilizing with the overhead absorption and and the cost reductions we've already done that we have that pathway to 15 plus percent.
Right and I can appreciate that that's kind of my point is that we're targeting 15%, but if material prices don't cooperate 50 per cent is not gonna have and Italy. So should we be thinking about and absolute number next year of 90 million and more is better bogey to think about considering material costs can be so volatile.
What loved that material cost you if material cost stabilize.
And you don't see that volatility from quarter to quarter. So we won't have that quarter to quarter impact, we still can reach 15% adjusted EBIT and now we need to have that kind of higher level of volume sales volume, we think of it because again, it's the material just a pass through but if we were to achieve let's say by 50 and sales.
Next year.
Even with a higher material price, we still can achieve 15% EBIT and we just can't have that volatility from quarter to quarter, because that drags on our quarter and CT margins right and there's a short term impact.
Okay I understand that thank you and then.
So you're on track with the new customer.
Supplier.
Any concerns or comments with regards to are they on track is there a supply chain outside of you on track.
Have you looked into that at all I'm, just trying to understand that right.
And yet I guess first we're focusing on term and internally on our commitments to the schedule to the cost of the preparedness and.
And.
We are right on on path and on track with our expectations internally the other things.
And when we when we look into those are trying to look into those.
We will stay focused on what we're responsible for taking care of uncertainly and keep our eye on those things, but there's nothing really to report there either it all appears to be going as expected.
Okay. Thank you and good luck.
Thanks.
Thank you and once more and if you'd like to ask a question. Please press Star then 1 on you touched on and farm.
Okay.
Alright, and is there something else at the present time. This concludes our question and answer session I would like to return on the call about compounds Chairman President and CEO for any closing comments.
Thank you thank.
Thank you all for your time today and your continued interest and we look forward to talking with some of you later today.
Geoffrey and <unk> conference, so with that we'll say goodbye, but thanks again for your attention today and appreciate it.
Thank you the conference.
And is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yes.