Q1 2022 Mayville Engineering Company Inc Earnings Call
And dedicated team I am confident in the future of the company and I look forward to ensuring a successful transition in the coming quarters.
And as a meaningful shareholder myself I look forward to watching the company's continued success for many years to come.
With that said, let's turn to the quarter.
Year to year net sales increased approximately 21% to $136 3 million and net income increased 50% to $3 8 million compared to last year.
Basic earnings per share increased six to.
To <unk> 19 per share.
We delivered adjusted EBITDA of $14 $8 million as supply chain disruptions that impacted our customers' schedules during the fourth quarter of 2021 merely deferred our volumes ended the first quarter.
We also continued to recover general inflationary pressures on raw materials labor and other product content through contractual material price adjustments and increased commercial pricing.
In summary, we delivered delivered a much better performance when compared to the same period last year, we continued to execute effectively and manage through the ongoing supply chain constraints that are impacting many of our customers.
Our operations team has done a tremendous job in maintaining Max supply chain, which is 98% focused in the us while working to adapt and overcome the challenges.
All the omicron surge caused some manufacturing companies to falter, we were able to maintain our production capacity first since the pandemic began we've provided a clean and safe environment for our employees.
When we have seen increased absenteeism through illness.
To minimize the impact by moving employees to other locations and finding ways to still deliver.
<unk> and adaptability are still part of our mantra.
The end markets, we serve continue to forecast strong demands over the mid and long term.
Sure.
While the commercial vehicle market has seen the largest impact from supply chain disruptions to date and continues to expect disruption through 2022, we have seen sequential improvement due to the ongoing strength in freight demand and robust backlogs at the Oems.
This leads us to believe this will continue to be a strong market for Mac over the medium to long term.
Power sports continues to be a strong and growing market for us.
Overall strengthen retail demand coupled with low dealer inventories are leading to increased volumes as customers work to restock over the course of 2022.
The construction and access end markets have continued to show strength with residential construction.
Maintaining its stability and with nonresidential also showing some signs of improvement.
We believe that we will continue to see increased volumes in the future based on low dealer inventories and the need to restock fleets.
And the AG market, we continue to see strengthening demand here advancements and equipment productivity combined with low machine inventory low global crop inventories and strong crop prices will continue to drive volume growth over the mid to long term farmers are making a positive.
Margin dollar.
Concluding with our military segment, which remains a stable market for us our customers have a solid backlog for U S government contracts and we continue to see opportunities based on upcoming vehicle updates and unique opportunities such as a new two year aftermarket program we are working.
For a top customer.
While supply chain disruptions persist pandemic related issues have declined since February and we anticipate volumes will gradually improve as 2022 progresses.
Importantly, our new business pipeline remains strong we continue to build relationships and convert on new opportunities to expand our customer base and the markets, we serve with our capabilities and product offerings, we already have.
Our sales team continues to see business opportunities with new and existing customers coming from number one new model and program launches number two new product line offerings by customers number three outsourcing by Oems number four.
<unk> by Oems and number five takeover business with several top power sports customers.
I'll walk through some of the more exciting and noteworthy opportunities we see today.
We continue to launch new programs and products in the commercial vehicle market, leading to market share gains in the most recent quarter, we focused on model changeovers, particularly with the future greenhouse gas emissions regulatory standards and related vehicle updates.
We've been working closely with another major OEM on a long term outsourcing project, which leveraged our acquisition of DNP is a significant cross selling synergy opportunity.
The power sports market continues to be a very active space for us we see re shoring activity, where we are able to leverage our footprint with a leading power sports customer to gain market share and we continue to work on outsourcing projects plus take over and new model launches with some of our newer cut.
<unk>.
In the agricultural space, we see opportunities on numerous new programs as our customers update their equipment to the latest technology for farmer productivity improvement, while also seeing increased opportunities in the small AG and turf care space for takeover business.
And the military end market our market share on tactical wheeled vehicles continues to expand with our customers launching their next generation of products and new product development activities that have the potential to bolster revenues in the coming years.
Overall, the new business pipeline remains robust with numerous projects being actively pursued.
We're excited about the multiple avenues for growth with both current and potential new customers.
We'll continue to provide updates in the coming quarters.
We can also continue to see a pipeline of interesting M&A opportunities and focus on analyzing the potential targets that could open up new end markets expand product offerings and develop new relationships with new blue chip customers and possibly extend our <unk>.
Geographic reach.
Strategic fit and rational valuation, though remain our top considerations and we will continue to pursue logical deals as the year progresses.
As we mentioned in our last call. We are in the process of Repurposing, our investments and Hazel Park, Michigan, and investing and redeploy about automation and capacity to support the growth of our base business.
We will be ramping up in the second half of this year to support meaningful volume for new projects and growth with current customers.
We remain very bullish about the location.
Technology skilled workforce in southeast, Michigan and are pleased with the speed and amount of changes we've already made over the past two months, which bodes well for the future.
Speaking of Hazel part I would just like to reiterate our position regarding the fitness customer.
As we outlined during our last call in February our fitness customer informed us that it does not forecast any demand for any products or parts that are the subject of our agreement with that customer for the remainder of the agreement's term, which ends in March of 2026 as such we have take.
And we will continue to take steps to reduce operating costs and capital investment for this project wherever appropriate.
It is important to reiterate that we remain confident in the protections provided by our agreement with this customer and continue to vigorously pursue this matter to ensure the terms are honored.
Our first quarter results reflect the stable to improving volume trends, we are experiencing which in conjunction with the commercial pricing increases we have implemented led to improved results. We continue to observe positive demand signals across all of our customers and end markets.
We see the potential for significant new business opportunities and remain ready to increase our production volumes as needed.
We're investing in the right technologies and facilities that will allow us to successfully address this demand.
I'd now like to turn the call over to Todd to discuss our financial results in more detail.
Thanks, Bob I'll begin with a look at our first quarter.
We recorded first quarter net sales of $136 3 million.
31% increase over first quarter of last year, which was primarily driven by contractual raw material price pass throughs to customers commercial price increases and improved volumes.
Factory margins were $14 9 million for the quarter in line with last year and inclusive of commercial price increases, which were slightly offset by Hazel park transition costs of $1 9 million during the quarter.
Manufacturing margin percentages were 10, 9% versus 13, 1% in the same prior year period. The decline was primarily due to Hazel park transition costs and the dilutive impact of material price pass throughs to our customers that increased sale, but do not impact margin dollars.
SG&A expenses were $5 7 million for the first quarter of 2022 as compared to $4 7 million for the same prior year period.
Increase stems from higher labor and information technology costs consulting and professional fees and a return to more normalized spending patterns.
For the first quarter income tax expense was $1 2 million on pre tax income of approximately $5 million.
Our federal net operating loss carry forward was approximately $18 $5 million as of quarter end, which was driven by pre tax losses incurred in prior years.
The NOL does not expire will be used to offset future pre tax earnings.
We continue to anticipate our long term effective tax rate to be approximately 27% based on current tax regulations.
Adjusted EBITDA was $14 8 million for the first quarter after the $13 million for the same prior year period.
Adjusted EBITDA margin percent decreased by 80 basis points to 10, 8% in the quarter due primarily to the dilutive impact of material price pass throughs.
Excuse me.
Basic earnings per share were <unk> 19, a.
A 6% increase over last year.
Now, let me address our capital expenditures balance sheet liquidity.
Overall capital expenditures for the first quarter were in line with our expectations at approximately $13 million.
As compared to $5 6 million for the same prior year period.
The increase primarily relates to the final capital payment related to our former fitness customer the Repurposing of Hazel Park, Michigan facility and continued investment in new technology and automation.
As of March 31, 2022, total outstanding debt, which includes bank debt capital lease and finance agreements with $86 8 million as compared to 49 million at the same point last year.
The increase in debt relates to working capital increases due to higher steel prices and production levels as capital spend as well as capital spending.
Now I would like to discuss 2022 guidance.
We are reiterating the financial if we first provided in February and continue to expect net sales between $480 million and $530 million adjusted EBITDA between $58 million and $70 million.
Again, it's worth repeating that our outlook assumes no revenues or recoveries associated with the fitness customer.
As we noted last quarter, we were still assessing our capital plans in light of changes in our customer base.
As you saw on the release, we are now providing that information as products.
For 2022, we expect our capital spending to be between $55 million and $65 million, which will be focused primarily on investments in new technology and automation.
Adding equivalent related to new programs with existing customers and the repurposing of assets at the New Haynesville Park, Michigan facility.
While supply chain disruptions persist and we continue to keep a watchful eye on COVID-19 risk.
End market demand remained strong and we believe our bonds will gradually improve as we move through second half of 2022, as our customer supply chain challenges begin to improve.
We continue to expand our existing relationships and convert new business opportunities.
Company's CCAR market, leading operational expertise and unparalleled flexible production capabilities.
The low end of our 2022 outlook represents considerable projected growth over recent years results and what eclipse our record performance in 2019.
I'll now turn the call back over to Bob.
Thank you Todd so while supply chain disruptions persist pandemic related problems have stabilized somewhat and we anticipate volumes on a per day basis will gradually improve as we move through 2022.
We continue to build relationships and convert new business opportunities to expand our customer base and the markets we serve.
We see meaningful opportunities for growth in our future and believe we are well positioned to address them in the years ahead.
All in all the near and long term future prospects look very bright for Mac.
As I look towards the last five months of my tenure wood Mac I know I will be leaving our market, leading company and well experienced team that's well positioned for many years to come.
Operator, we'd like to open the call for questions now.
Yes.
Absolutely. Thank you.
I would like to ask a question. Please press star followed by one on your telephone keypad.
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A reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question I'm.
Our first question comes from the line of Mig <unk> with Baird.
You May proceed.
Good morning, guys, it's sugar Broski on for Mig This morning.
Hi, Joe Hi, Joe Good morning.
Good morning.
Yes.
<unk> sales were well ahead of our expectations EBITA margin was about in line with.
We were expecting.
You maintained your guidance, which makes sense. After only one quarter was wondering how Q1 compared to your own internal forecast and expectations.
Well I guess from an internal standpoint, I think we.
We met our internal expectations I think from a sales standpoint, we probably started the year expecting to see material price adjustments going down a bit from where it ended the year and it did modestly.
But.
Perhaps less so than one would imagine so.
We performed as we expected.
And Todd.
Todd maybe you have some additional color to add to that.
Just kind of mentioned that the material pricing was kind of in line, what we expected in the first quarter.
And as Bob mentioned, certainly demand end market demand remains strong and we met our internal expectations.
Got it and maybe asking about those.
Material pricing pass throughs.
We did see steel pick another kind of leg up in the first quarter. Just wondering how the pass throughs worked in the first quarter and kind of where you're at as far as any maybe lags that.
That might have existed in the quarter.
Yes, I think.
I think we did.
We adjusted as needed and as the market changed we adjusted with it Ryan maybe you have a comment further on that.
And Joe just to reiterate those are generally kind of addressed at a macro level on a quarterly basis. So.
Coming out of the fourth quarter, which is really the key.
Kind of a slow decline.
In steel prices over the quarter it did bounce back up a little bit.
With the conflict going on in Europe , but as we look ahead to the future that will soften up again, so we will continue to maintain.
Our activities when it comes to material price adjustments with the customer the lagged last year.
There was a really sharp steep trajectory.
That happened this year, there will be some softening favorably as we go into the second quarter of the way the contracts work.
And then likely some modest increases that occur again.
Quarter.
Got it okay.
Okay.
Helpful. And then my last question, maybe drilling into commercial vehicle.
That's a truck orders have been quite negative in the past six months production has also been negative but to a lesser degree.
Backlogs are still up year over year I guess, what are you hearing from your classic customers regarding.
Regarding demand for your products.
Going forward over the next couple of quarters.
Yes, I mean, we still our outlook is still strong demand when we think about the sequentially coming out of early fourth quarter of last year, where we saw more.
Severe supply chain disruptions with the first quarter circling it out.
Much better I think the question now is how can.
Build rates increased.
Increased or so and worry about.
Or days out of the schedules due to part shortages and things like that so you are correct.
Overall net orders are down, but I think that's also with the backdrop of a backlog.
It's pretty cool through 'twenty, two Oems really limiting their ability.
Limiting the order intake so there hasnt been anything from our side that would lead us to believe there's any softening in the overall market the backlog remains strong.
<unk> still have the desire to increase the daily run rates.
Alright, Thank you very much.
Thank you for your question. Our next question comes from the line of Larry de Maria with William Blair. Larry You May proceed with your question.
Thanks, Good morning, everybody.
Hey, good morning, Larry Good morning, Larry.
Hi, folks as it relates to <unk> Park.
When might we get some tangible announcements on the filling of that space kind of curious about the ramp in the second half and into next year and you maintained your guidance, but now we have some business going into April . So are we assuming some of the base business is softer and Hazel picks up some of that.
Some of that weakness or how youre thinking about that.
Yes, the way, we're thinking about it is that.
The work that we're moving there has already been launched so the launch risk has been very mitigated.
We are creating additional capacity than in those locations that need the additional capacity for their key customers. So we're mitigating some risk.
But we're also growing that capacity overtime as experienced happens we will we will get some more.
Direction, there, we can talk more about it quarterly but.
It's going in the right direction, we're pleased with our progress.
More to come.
So are there specific numbers, we can point towards towards second half haynesville in terms of maybe absolute dollars or something like this and is there still potential for upside this year in haynesville with new wins or is that more likely in 'twenty three.
Yes, it will be a ramp year. This year in the second half. So I think the benefits will come in in 'twenty three.
Okay. Thanks, and then you talked about having I guess decent visibility on the cash repayment from the fitness customer.
Delve into that a little bit more is that likely to occur this year.
How confident are you and just help us understand the outlook there.
Yes.
I think the right way to put it is we're actively working on that with them.
And theres not a lot of commentary we can add around that at this time.
But as is the.
Information is available we will certainly update everyone on that progress.
Okay last question sorry for another one.
The military outlook, you kind of called out as being positive can you just give us some general trends and direction on that.
Maybe the growth rates of dollars over the next few years is that if we hit a base level that we're going to grow from that maybe counter cyclical to the possibility of a recession that we are.
Starting to factor in.
Larry going back into 2019, even during Covid. The military market has been very stable for US right now we're in the process of doing some updates on customer vehicles, that's allowing us to grow.
Grow some share so there is some incremental.
Revenue that's happening in that space in the long term, we also feel positive.
With our customers that when some of our substantial contracts with the government.
We feel will also be participating with them as they get it.
Two of the launches kind of looking out into mid late.
2023.
It should give us some more opportunity to grow that.
Great.
Yes.
Yeah.
Yes, when you think about it Larry I guess.
We're not just taking what we have and growing with the market, we're getting new business, we're getting new market share and those things.
Certainly help that picture no matter what.
Okay. Thank you very much good luck.
Thank you for your question Larry There are currently no further questions registered so as a brief reminder, it is star one on your telephone keypad to register your question.
Okay. We have a follow up question with Larry de Maria from William Blair. Larry Your line is now open.
Okay as long as there's no questions I'll ask one more.
Maybe on the power sports.
Again similar to the question on.
On the military and the possibility of a recession, how do you think this plays out.
Larry I don't know if you continue that question it kind of so I could cut off there at the end of the power sports. One thing we are watching as interest rates is that financing side of that could have some impact on volumes, but as we follow our customers and we're in.
In side by sides Atvs.
Marine boating industry motorcycles.
Inventory is down still about 70% from cold and overall as an industry very solid.
Backlogs there are most of those units being pre sold.
Strong outlook at the OEM level.
Even some of the Oems going so far to say, they probably won't even be able to restock.
Inventory until the 2023 time frame so as long as retail holds up and I'll say interest rates.
I don't have a rapid increase we still believe retail demand will be very strong and it will still be a need to restock at the dealer level.
Definitely it looks good from a medium to long term in power sports.
Okay.
I guess with that I.
I think we'll wrap it up for the day.
Thank you for your time today and your continued interest and Mac. We look forward to seeing you in person at the William Blair Conference next month in Chicago.
For joining our call today.
This concludes.
Engineering Company first quarter earnings call. Thank you for your participation you may now disconnect your lines.
Okay.