Q3 2021 Mayville Engineering Company Inc Earnings Call
Okay.
Yeah.
Yeah.
Welcome everyone to the Mayville Engineering company third quarter earnings call. My name is Victoria and I'll be coolness your call today.
If you'd like to ask a question during the presentation you may do so by pressing star one on your telephone keypad I'll now hand over to your house, Nathan Elwell Investor Relations to begin Nathan. Please go ahead.
Thank you welcome.
Welcome everyone and thank you for joining us on today's call.
Two 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 20, <unk>. The Securities Exchange Act of 1934 as amended.
Such statements Express our expectations anticipations beliefs estimates intentions plans and forecasts.
Because these forward looking statements involve risks assumptions and uncertainties and actual results could differ materially from those in the forward looking statements.
Information regarding such risks and uncertainties, please see our filings with the SEC, including finding.
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 call will involve a discussion of certain non-GAAP financial measures.
Conciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at Mec, Inc.
In Stockholm.
Joining me on the call today is Bob Capex, Chairman, President and CEO Tom <unk>.
CFO and Brian right, but EVP of strategy.
First Bob will provide an overview.
Of our performance then Todd will review, our financial results and guidance with that I'll hand, the call off to Bob. Please go ahead.
Thank you Nathan good morning, everyone.
Sitting here today, Max headlines are continued strong medium and long term demand trends across the end markets we serve.
Plus increased interest in our services from a broadening range of companies. However are companies to supply chain constraints have resulted in near term volume deferments.
For the third quarter, we produced net sales of $109 million approximately half of the $17 9 million improvement over last year was driven by material price pass throughs to customers with the remaining increase attributable to improved demand.
We delivered EBITDA of $10 million, which drove 10 operating income was $864000. Despite the macroeconomic challenges. We are now facing in 2021, we have once again outperformed on almost every metric on a year over year basis.
For example, manufacturing margins were $10 9 million, which increased 1.2 million over last year due to higher volume of production higher scrap income.
Partially offset by inflationary pressures.
Across the board the demand trends continued to be very positive.
However, our short term volumes were impacted this quarter.
Supply chain disruption became more of a problem for some of our customers.
This is a temporary situation and there are two pieces of good notice for Mac.
First these volumes have only been deferred and we expect to work through the situation with our customers as their supply chains adapt in the coming quarters.
Second Max owned supply chain is 99% concentrated in the U S and we have been able to maintain our supply of raw materials and components with only minor disruption.
At higher prices that means we remain ready when our customers are able to ratchet up their volumes again.
Our performance has been affected by the dramatic production changes in September at class eight truck Oems, which led to rapid volume deferments for Mac cluster general inflationary pressures on labor and raw materials, which we expect to recover through increased pricing and contractual.
Material price pass throughs.
As we manage through these third quarter challenges. It was important that we maintained our skilled workforce. So that we are in a position to address the forecasted strong customer demand when supply chain issues are resolved.
Recruiting quality employees remains a challenge, although our continued investment in flexible redeploy a whole automation and process improvements is allowing us to cost effectively grow our capacity.
It is worth noting that while we have learned to operate effectively during the pandemic and Covid cases are not problematic in the communities. We operate in the health and safety of our workforce remains a top priority and we are continually reinforcing all safety measures and operator.
Within the CDC and state guidelines.
As I already mentioned the end markets, we focus on today continue to forecast a positive outlook.
For instance, the commercial vehicles market continues to have strong market demand and then the short term has been probably the most impacted by supply chain issues at our customers.
With a strong backlog and continued strong freight demand. We believe this market will remain positive over the medium to long term.
Power sports remains strong with demand for outdoor recreation oriented products remaining at elevated levels.
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 and better serve their customers.
The construction and access end markets have continued to show improvement in residential construction, particularly for equipment that is tied to housing and equipment rental.
While nonresidential oil and gas have not seen significant recovery yet.
Thanks to these areas are starting to show signs of improvement.
With lower dealer inventories and rising oil prices. We believe this will continue.
We continue to be amped up.
Mistake regarding eight due to the improving crop prices low.
Low crop inventories and low equipment inventory.
We anticipate that this area will continue to see improving volumes in the near to mid term.
Concluding our comments with our military segment.
It continues to be a stable market for us with customers, having a solid backlog for U S. Government contracts, we continue to see potential for increased revenues due to vehicle updates that are being implemented by our customers.
While demand continues to be strong.
Supply side headwinds at our customers continued to enter or grow.
Similar to the rest of the economy supply chain disruption is impacting our customers, which in turn negatively impacts our production volumes.
In addition, as you may have seen in the news one of our top customers is experiencing ongoing labor issues, where their union, which began in October we are working with this customer and for this customer to do whatever we can to help. However, we do expect this to disrupt our near term.
<unk> production schedules.
One of our biggest priority is maintaining and expanding our base of skilled employees to help us address our growth potential.
We expect in most of our locations finding the right people to continue we will continue to be a challenge for the foreseeable future. Our HR team is using a variety of creative recruiting strategies and initiatives, while we as a company continue our investments in flexible and read.
Deployable automation and technology.
I am pleased to report that production preparation and Haynesville part of Michigan for our leading U S based fitness customer is progressing well.
This 450000 square foot facility gives us the floor space and capacity and the right employment market. So we have decided to add a second phase of capacity at the same location to support overall demand trends for other customers.
We continue to expect the initial phase of capacity to be ready during the first half of 2022 and the new second phase to be ready in the second half of 2022.
During the third quarter, we invested approximately $6 5 million of Capex and the new facility and expect to invest $35 million to $40 million, just and Hazel Park during 2021.
The market diversification will be evident in our full year 2022 results and we expect to see more of these types of product localization opportunities in the years ahead.
In addition, our new business pipeline remains strong we have continued to build relationships and convert on new opportunities to expand our customer base and the markets. We serve I'll walk through some of the interesting opportunities we see today.
The power sports market continues to be a very active space for us with continued market share growth on new programs with existing customers that are planned to start production next year.
Plus new and takeover programs with new customers that we began working with this year.
We have been continuing to expand our market share on the next generation of tactical wheeled vehicles for the military that will increase our revenues over the course of the next couple of years. In addition, the current programs, we have seen increased activity and service order demand and further market share.
Penetration and expansion that will bolster revenues over the coming quarters.
Commercial vehicle market has new model releases, which will lead to continued market share gains for us.
We expect this to continue as customers work on their next generation products, which will allow us to drive organic revenue growth.
And the AG market, we continue to see our customers expand their product offerings, which has allowed us to gain additional volume across our current product offerings.
Overall, the new business pipeline remains robust with numerous projects being actively pursued we're excited about all of the avenues of growth with current and potential customers and we will keep you updated on the latest developments over the coming quarters.
Our new business pipeline remains strong and we will be pursuing these opportunities both at existing and new customers. We look forward to providing these updates.
There have been no major changes in our capital allocation priorities since last quarter. However, given the fact that our balance sheet is strong with a current leverage ratio of one two times. We have received authorization from the board to extend our share repurchase program, which was due to expire at.
The end of the year.
We can now repurchase up to $25 million in.
Shares through the end of 2023.
Of course, we also have access to sufficient capital to make important investments to support long term growth and consider external investment opportunities.
On that point, we continue to see a good pipeline of M&A opportunities and remain focused on analyzing potential targets that could opening new markets develop new relationships with new potential blue chip customers and possibly add new geographies.
Above all else.
These certain that strategic fit and rational valuation are the top considerations when considering opportunities and we continue to review and pursue logical potential deals.
Our recent performance and current outlook look out of the business remains very positive as we address the supply related challenges and manage the strong demand trends that we're seeing in virtually all of our end markets.
These trends are set to continue for the remainder of this year and for the foreseeable future.
I would now like to turn the call to Todd to discuss our financial results in more detail.
Thanks, Bob I'll begin with a look at our third quarter financial performance before providing commentary on our balance sheet liquidity and thoughts on guidance.
As we noted in our press release, we recorded third quarter net sales of $109 million as compared to $91 1 billion for the same prior year period. The approximate 20% increase was primarily driven by contractual raw material price pass throughs to customers in the current period and market demand increases following the pandemic that cause customer shut.
During the prior year period.
Manufacturing margins were $10 9 million for the third quarter of 2021, ASP at $9 7 million for the same prior year period, an increase of approximately 12%. The increase was driven by higher production volumes and scrap income, resulting from improved market pricing for scrap material in the current period.
These improvements were slightly offset by inflationary pressures on wages benefits materials and general manufacturing supply.
Company also incurred approximately <unk> thousand launch costs related to the new Haynesville part, Michigan facility during the third quarter.
Overall, we expect to incur between $3 7 million to $4 3 million in launch costs. This year. In addition, the prior year period included 687.
Our restructuring cost charged to cost of sales related to the Greenwood facility closure, which was completed in the third quarter of 2020.
Manufacturing margin percentages were 10% for the third quarter of 2021 as compared to 10, 7% for the same prior year period, a decrease of 70 basis points. The decline was due to the $8 4 million impact of material price pass throughs that increased sales with do not increase margins to seven.
Dollars associated with contractual maturity pricing lag $800 of launch costs associated with the new Hazel Park, Michigan facility, and 400000 or other inflationary cost pressures.
When the impact of these are removed our incremental margin percentage would have been 22, 7%, which is right in line with our historical average of 22, 5%.
Profit sharing bonuses and deferred compensation expenses were $1 9 million for the third quarter of 2021 as compared to $2 3 million for the same prior year period. The decrease was driven primarily by last year's acceleration of the accrual allowance as we reestablish discretionary bonuses and 401k related.
Cool as business activity in the prior year period began to approve post COVID-19 related shutdowns.
Other selling general and administrative expenses were $5 3 million for the third quarter of 2021.
As compared to $4 5 million for the same prior year period.
These expenses increased $850000 due to higher salary payroll travel and entertainment expenses, which were artificially low in the prior year period due to COVID-19 pandemic.
For the third quarter of 2021 income tax expense was approximately $100000.
On pre tax income of $300.
Our federal net operating operating loss carry forward was approximately $12 million as of quarter end, which was driven by pre tax losses incurred in prior years the.
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 $10 million for the third quarter of 2021 as compared to $9 8 million for the same prior year period.
Adjusted EBITDA margin percent decreased by 160 basis points to nine 2% in the quarter.
As compared to 10, 8% for the same prior year period and represents an incremental margin of only <unk>, 9%.
Our adjusted EBITDA margin and margin percentages were impacted by increased sales offset by raw material price pass through to customers and inflationary pressures on wages benefits material and general manufacturing supplies during the current period.
Again, if we remove the aforementioned short term inflationary costs are incremental margin would've aligned with our historical averages of 22, 5%.
Now, let me address our capital expenditures the balance sheet and liquidity figures.
Overall capital expenditures for 2021 are expected to be in the range of $52 million to $57 million $35 million to $40 million, specifically focused on investments in the new Haynesville part, Michigan facility.
Capital expenditures of $9 6 million for the third quarter of 2021 were in line with our 2021 budget and focus on our continuing investment in Haynesville Park, which account for $6 $5 million with the remainder being for the continued investment in new technologies and automation of our base business.
We have invested $26 $6 million year to date as compared to $5 4 million for the same prior year period incur.
The increase is primarily due to the prior year period being artificially low as we can conserve cash during the height of the pandemic and our current year investments in Haynesville Park.
As of the end of the third quarter of 2021 total outstanding debt, which includes bank debt and capital lease obligations was $56 9 million as compared to $62 8 million at the end of the third quarter of 2020.
The nearly $6 million that decrease is due to continued positive operational cash flows which resulted in our leverage ratio dropping to one two times based upon a trailing 12 month adjusted EBITDA of $46 4 million.
The current year leverage ratio was substantially lower than the two two times for the third quarter of 2020 and significantly lower than our covenant threshold of three five times.
Now I'd like to discuss 2021 guidance base.
Based on the recent challenges related to OEM supply chain issues impacting short term volume.
Overall economic climate in the broader industry and market trends, we are modifying our 2021 financial outlook back to our original projections.
Sales are expected to be between $450 million to $470 million down from the prior range of $470 million to $490 million. We're also guiding projected adjusted EBITDA. The lower end of our range of between $46 million and $52 million net of launch cost associated with.
A new customer relationship $3 7 million to $4 3 million.
With that said, please remember that our outlook assumes our end markets remains stable supply chain constraints do not dramatically worsen and that business activity as a whole continues to trend positively.
I will now turn the call back over to Bob for closing remarks.
Thank you Todd.
I am pleased today, with where things stand that Mac with the macroeconomic headwinds.
Limiting our potential growth, but we will likely continue to see that in the near term I am gratified with how our team is responding to these challenges and with the demand trends, we're seeing across our business today.
We are maintaining and expanding the great relationships that we have with some of our best Blue chip companies in the world and have interesting opportunities on the horizon with new companies and new end markets I'd.
I'd like to thank our employees shareholders for their dedication.
<unk> and willingness to go the extra mile for our customers.
I'm also excited about our build out and expansion plans for our new Haynesville Park facility in Michigan, which will be a big near term focus for us and look forward to addressing the opportunities that 2022 has in store for Mac.
With that operator, we'd like to open the call for questions now thank you.
Thank you very much.
I will start the Q&A session, if you'd like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two to withdraw your question. Please ensure that women's apparel question. Your telephone is muted locally.
Our first question comes from Mig <unk> from Baader Bank.
Please go ahead.
Thank you and good morning, everyone.
Good morning Mig.
So.
Looking to maybe clarify some of your assumptions around your guidance a bit.
If I'm looking at the fourth quarter here.
I'm sort of curious here do you think that youre going to be able to increase production sequentially with your customers.
Deliveries based on what you're hearing right now be able to increase sequentially because the range rate is suggesting anywhere between sort of flattish sequentially to actually a little bit a little bit of growth.
Maybe maybe even.
Quite a bit of growth relative to <unk> sequentially.
Okay.
Yes, I think make that Theres, a couple of contributing things going on here.
In the fourth quarter, one will be with continued.
Rice increases based on material cost pass throughs.
That are still occurring going into the fourth quarter greater than they were in the third quarter.
And <unk>.
Secondly, some some modest volume improvement, but also some pricing action to.
Lift pricing in regard to some of the inflationary items that we've been experiencing.
Okay. So volumes you are saying are getting a little bit better sequentially.
Based on what you know today.
Are there specific end markets that are starting to get a little bit better.
Can you comment on that.
Yeah, Hey, make their vertical right.
King.
In the third quarter, we experienced some more severe shutdown activity, particularly in the commercial vehicle space and as they work through.
I'll say the supply chain challenges at their level sequentially, we will see just more days of production.
The schedule in the fourth quarter for the most part all of our end markets are very strong if you think about power sports and construction of access agriculture.
<unk> watched the labor issues at one particular customer to see what the overall impact is there but.
For the most part we would expect volumes to continue to build on into next year with really the caveat being.
<unk> committed meaning our customers continue to ramp their volumes to meet their demand.
As they work through supply chain issues.
I appreciate that and I understand that visibility is.
Perhaps low if we're thinking about 2022.
Presumably maybe a little bit better in terms of the fourth quarter itself.
So.
You mentioned that pricing is once again going to accelerate and that seems to be.
Dilutive to margin if I'm thinking about.
Manufacturing margin sequentially in the fourth quarter is there any reason to believe that the manufacturing margin can improve sequentially relative to relative to the third because presumably.
Pricing remained as big a drag it's not bigger.
Bigger and.
Labor is.
Still going to be a challenge that youre going to have to deal with so how do you think about that.
Good morning, Magnus is Todd So when you think of the fourth quarter. The manufacturing margins as Bob mentioned, we will have material place bathrooms that will continue to be a bit dilutive to the percentage, but there's also other pricing activities are ongoing and so that'll afford a lot of that impact and so when we look at the fourth quarter, we do.
Sequentially that we will see a little bit of a step up of the manufacturing margin now keep in mind you have to exclude the impact of launch costs per for the Hazel Park facility as those costs really begin to ramp up in the fourth quarter.
Yes.
I guess my final question, then with that perspective that you've provided is it fair for us to think that that really the bogey as far as guidance is concerned is really towards the low end of the range Boston because.
Love Your you've got one quarter left and you put out a very wide range in terms of your EBITDA guidance.
At least to me it seems like the low end is kind of what we should be thinking.
For the fourth quarter.
I think all things considered make thats thats a correct assumption.
Yeah.
I appreciate it thank you.
Thank you very much Mick on next question comes from glad this is Keith from Citigroup flat. Please go ahead. Your line is open.
Good morning, guys. Thanks for taking my question.
Good morning.
So.
You talked about obviously.
Labor availability increased wage pressures and you mentioned the strike yet.
Domestic manufacturers a large customer of yours. So can you talk about.
How much of an impact those labor actions may have had on your demand outlook for this year and then just more broadly how you're thinking about the risk of incremental labor actions to impact either customer customer demand or your own abilities to produce.
Yes.
We've.
Included in our forecast some moderation.
Cause of the event that's ongoing there.
And I guess.
On your question was in regard to our customers' customer I guess.
I can't really speak well.
In regard to in regard to your broader customer base, whether you see any risk of incremental sort of labor disruptions.
At other customers or within your own operations.
Yeah within our own operations I think not.
At our other customers.
I really can't speak to that they are they are working closely with their people everybody's.
Seeing some good things going on in the marketplace and they'll deal with it accordingly.
As we have.
So I think we're.
We and our company are in good shape there.
Certainly the limited availability of skilled workers.
We're offsetting with more investments in technology and automation.
Those are things that are going to continue to improve our output.
Okay. That's that's helpful color and then just.
Yes.
There's a number of moving pieces here right as we think about 'twenty two I know you're not guiding to 'twenty, two yet, but given just right.
The cost pressures, we've seen some timing lag between when pricing comes in.
This facility ramped.
In Michigan.
You are building out I guess can you give us some color on just how youre thinking about the potential for EBITDA margin expansion in 'twenty, two and then the longer term path back to 16% or $2, 16%.
Sure. Let me, let me make a couple of general comments and I'll, let Scott and maybe provide some further color.
Obviously higher volumes and better utilization.
It always helps in your absorption.
Typically and we've had some choppiness here in the third quarter because of these shutdowns et cetera.
Our nation smooth so you have to work through that and Youre not maybe as efficient with your people as you'd like to be.
So I think.
Thank those margins will improve because of more volume and less choppiness, even though we're anticipating that.
That to continue for a bit here.
And so far as.
No revenues.
And all of that will depend on our customers' timing.
As as that.
The information becomes available, we'll certainly be talking about 'twenty two at the right time with you.
And glad this is Todd.
But I would add is when you look at the third quarter results and Neal just around 9%.
Excuse me adjusted EBITDA, when you really look at the components of it and you factor out the as you said the launch costs the material pass through impact the material lag component on pricing and any other inflationary costs, which we have mechanisms in place to recover here in the coming quarters and when those markets begin to stabilize.
Our third quarter in a general sense, a little bit near 14% adjusted EBITDA already and so when you think about volume increases and getting back to pre pandemic levels you could easily make that assumption that we're going to have a good increase from 14% to 15, when you think of leveraging that fixed overhead so really as we stand today we.
Feel very confident in.
And things we've put in place, we think of as Bob spoke to new technologies and automation the plant consolidations over the last 18 months the launch of the Hazel Park facility and then our pricing strategy. So I think we're really aligned around that 15%, we just need to get back to that pre pandemic type volume.
Yes.
Okay. That's really helpful color guys I'll hop back in the queue. Thanks.
Thank you.
Thank you very much flat and we will now pass over to Larry de Maria from William Blair Louie.
Your line is open.
Thanks, and good morning.
Good morning, Larry Larry.
So just following on the last line there we've been talking about hitting $90 million EBITDA next year for quite a while.
And now it sounds like we're talking about new customer coming on early in 'twenty. Two now were talking first half 'twenty. Two so I'm. Just curious are we thinking this is slipping now.
Do we still think 90 is achievable next year and do we still expect $15 million in EBIT.
The new customer or is it more than that because we have you know more or less double the size of facility. So can you just kind of update us on all of those factors should we think.
I think Larry generally weak.
We haven't talked about 2022 guidance however in a big.
Big picture I know many of the analysts have put.
A number to it.
<unk>.
I think.
That number is something that we'd have to continue to look at and study before we come back in and make comments on it.
We are progressing our.
Our margins higher absorption.
And our volumes are getting better all the time.
So we are definitely on that app to the to the 15%.
And.
Yes.
It will be a matter of timing.
We said that we expect some headwinds even in the future I don't know how big they will be.
But I don't know others.
Work to be done at our customers to get beyond that and get more stable. So I have to be a little careful on putting out expectations at this point.
Time will give us better information.
Okay.
Is the EBIT number that you've guys have formally talked about contribution next year from the new customer is that still in play.
Is it 15 or is it more than that now with the larger.
No I think Thats generally January generally in the ballpark.
Okay.
And then.
Obviously.
Dear strike.
But it is a.
Are we seeing any changing.
In the market for orders or are they just are we still getting orders and delivering product to them because what I'm curious about is the.
The ability to slow down and then ramp up when this presumably gets resolved and.
Just curious about that from the timing and do you expect some moderation fourth quarter, but are we seeing yet or is it more of what we're just expecting to happen.
We have seen.
A little moderation, but they are continuing to produce as they've said.
We're continuing to ship product as they expect us to.
<unk>.
And I guess, so what the future holds.
We'll be up to them.
But.
Yes.
Then we had moderated a little bit.
I guess to give you a little bit more flavor there.
Yes, that's exactly what I was I was wondering last quick question on the M&A pipeline you didn't mentioned geography.
Or are we thinking close to home like Mexico, or when it comes to geography, a little bit further from home if you could just clarify.
It would be in North America certainly.
Okay. Thank you and good luck.
Thanks, Larry.
Thank you Larry and as a reminder.
Can you tell the questions. Please press star followed by one on your telephone keypad.
Star followed by one on your telephone keypad.
Yes.
Yes.
Thank you.
We're going to have nice have a question.
I'll pass over to Bob.
For final remarks.
Okay. Thank you.
Well. Thank you for your time today, everybody who was on the line and your continued interest and Mac, we look forward to talking with some of you at the Baird.
Industrial Conference next week and we appreciate all your questions and follow up thank you very much.
Thank you everybody for joining today's call you may now disconnect your lines.
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