Q2 2022 Mayville Engineering Company Inc Earnings Call
I'm, saying by major Oems are in our favor.
With our differentiated offerings and footprint, we are uniquely positioned to deliver significant value for our customers and our competitive advantages continue to grow.
But really my first priority is to listen and learn I will be visiting as many of our locations as possible in the coming months.
To meet the teams and understand what is working well and what needs improvement I will be meeting with our customers and partners to see what more we could do to help them achieve their goals.
I want to build upon our customer first mindset with the renewed focus on innovation I am confident in our ability to be nimble grow profitably and continue to expand both our customer base and offerings.
My initial focus will be on accelerating our use of innovation technology and lean manufacturing initiatives to help drive profitable growth.
With that said I want to congratulate the team on another impressive performance this quarter and I am pleased to report that our outlook for rest of the year remains positive.
Now I would like to turn the call over to Ryan Raber to discuss our end markets and new business outlook. Thank.
Thank you Jack and good morning, everyone. We currently serve five major end markets all of which continue to forecast strong demand outlooks. The commercial vehicle market is our largest market and continues to forecast strong demand through 2023 current ACC forecast predict 300000 units per year being produced despite the recent supply chain.
Disruptions that are expected to continue throughout 2022, along with some weakening of freight fundamentals. We have continued to see sequential improvement due to robust backlogs at Oems.
Power sports continues to be a robust market for us overall strength in retail demand coupled with low dealer inventories are leading to increased volumes. Our customers are striving to satisfy this demand and also start to restock, which will stretch for the second half of 2022 and into 2023.
The power sports market is sensitive to discretionary spending and interest rates and we are keeping a close eye on this industry with the continued inflationary pressures.
The construction and access in markets have continued to show strength residential construction is down slightly as expected with the recent rise in interest rates, but we are seeing both nonresidential and oil and gas projects showing some signs of improvement.
We believe that we will continue to see steady to increase volumes in the near term based on low dealer inventories and the need to restock fleets.
We continue to see strengthening demand in the AG market advancements and equipment productivity combined with low machine inventory low global crop inventories and strong crop prices, we will continue to drive volume growth for the foreseeable future.
Our military segment remains a stable market for us our customers have solid backlogs for U S government contracts and we continue to see opportunities based on near term planned vehicle updates.
While supply chain disruptions persist throughout our customer base, we anticipate volumes will gradually improve as 2022 progresses.
Accordingly, 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.
There are multiple sources of new business projects, we're involved with including new model and program launches new.
New product line offerings by customers.
<unk> by Oems outsourcing by Oems and takeover business with several top customers.
Let me walk through a few of the exciting opportunities. We are pursuing we are currently in the final stages of closing on a reassuring program for ATV and side by side components with a major power sports customer that is strategically working to realign their supply chain to a north American focus.
In addition to this reassuring opportunity. We just won multiple projects with significant content on next generation products for the same power sports customer.
Combining these two opportunities will more than double the size of our relationship over the next two years.
We were awarded a significant outsourcing project from our market, leading class eight truck manufacturer, which will begin production next year. This particular program leverage the cross selling opportunity or synergy from the DMT acquisition.
This outsourcing project as our customer removing their in house capacity for this component to allow them to build more vehicles and will become a great new program for us in 2023 and beyond.
Mac is currently investing in new capital to support this program, which is included in our 2022 capital expenditure guidance.
While <unk> has historically been focused more on the heavy and medium duty truck market. We recently secured a significant new business award on a new program for the light duty truck market through our market leading engine manufacturer that will continue to provide further diversification within our commercial vehicle market.
We are successfully building our relationship with a new power sports customer we added in 2021.
We were recently awarded a significant share of content on the new side by side model, using our engineering and manufacturing expertise to quickly grow this new relationship.
Reassuring also continues to generate additional opportunities many of which are in the early stages of negotiation.
These opportunities are in a variety of markets that we currently serve but are opportunities for us to secure new customers.
In addition to our current markets, we are continuing to work with new customers in new industries and in some cases, we've started making prototypes as part of developmental steps. We are also seeing traction on EV, primarily in our traditional markets of commercial vehicle and power sports and we expect further engagement and electrification.
As the industry continues to shift.
Overall, it is clear that both our business with current customers plus our pipeline of new projects with both existing and potential customers remained very strong as we look towards the second half of 2022.
Now I will turn the call over to Todd for a review of our second quarter financial results.
Thanks, Brian I'll begin with a look at our second quarter.
Second quarter net sales of $138 $3 million at 15.
<unk> percent increase over the second quarter of the prior year, which was primarily driven by contractual raw material price pass throughs to customers commercial pricing increases and improved volumes.
Manufacturing margins were $18 3 million for the quarter at $16 3 million for the same prior year period.
And that $2 million improvement Samsung commercial pricing activities as well as increased volumes and labor productivity improvements in our facilities that totaled $6 million.
These improvements were partially offset by the Haynesville park transition cost and other inflationary cost increases of $4 million.
And in fact, some larger percentages were 13, 2%, which is in line with the 13, 5% recorded in the same prior year period.
But keep in mind that versus the prior year, we have had nearly 150 to 200 basis points of dilution to our current percentage relates to higher material costs passed through to our customers, which increased sale, but does not impact the margin dollars.
SG&A expenses were $6 4 million as compared to $5 4 million for the same prior year period.
The $1 million increase is principally attributable to higher consulting and professional fees.
The second quarter income tax expense was $1 8 million on pre tax income of approximately $7 $7 million.
Total net operating loss carry forward was approximately $18 5 million as of quarter end with.
Which was driven by pre tax losses incurred in prior years.
The NOL does not expire they will be used to offset future pre tax earnings.
We anticipate our long term effective tax rate to be approximately 27% based on current tax regulations.
Adjusted EBITDA increased to $18 2 million.
Versus $14 million for the same quarter last year.
Adjusted EBIT margin percent increased by 140 basis points to 13, 1%, representing an incremental margin of 22, 9%, which is slightly above our historical average of 22 and a half.
The progression to our stated goal of 15% EBITDA is taking hold and we are confident we are on the right path to reach that goal.
Basic earnings per share were <unk> 29.
<unk> <unk> increase over last year.
Now, let me address our capital expenditures balance sheet liquidity figures.
Capital expenditures for the first half of the year were in line with our expectations at approximately $26 4 million.
<unk> 17 million for the same prior year period.
Increase primarily relates to the build out and Repurposing of our Haynesville part, Michigan facility and our continued investment in technology and automation.
We are finalizing the repurposing of our investments and the ease of our facility and are transferring project.
Current customers to that facility to support the growth of our base business.
We are on track to ramp up production in the fourth quarter to support meaningful volume in 2023 and beyond.
In addition, I am pleased to report we have already sub leased approximately one third of the Haynesville Park facility with a four year lease term.
We will provide more than one $8 million in annual lease cost mitigation.
We intend to use the remaining two thirds of the facility by our own project and remain bullish market location skilled workforce. We are hiring and are pleased with the progress we've made already.
As of June 32022, total outstanding debt, which includes bank debt finance lease obligation and financing agreement with $79 1 million.
As compared to $46 2 million at the same point last year the increase in debt related to working capital increases due to higher steel prices and production level as well as capital spending.
Finally, we continue to see a solid pipeline of interesting M&A opportunities.
We are focused on potential targets that can introduce new end markets develop new relationships with new blue chip customers.
<unk> expanded our geographic reach.
Strategic fit and rational valuation remain our top considerations, we will continue to pursue logical deals as the year progresses.
Now I'd like to discuss 'twenty two guidance.
We are reiterating the financial outlook. We first provided in February and continue to expect net sales of 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.
For the full year 2022.
Continue to expect our capital spending to be between $55 to $65 million.
Which will be focused primarily on investments in new technology and automation. The addition of equipment related to new programs with existing customers and the repurposing of assets at the New Park, Michigan facility.
I think it's important to note that we are hearing.
The end of this unusually high Capex cycle, and expect 2023 to return to more normalized spending levels.
In summary, our second quarter results continued to reflect steadily improving volume trends, which in conjunction with the commercial pricing increases we implemented over the past nine months as led to improved results.
While supply chain disruptions and inflationary pressures persist and market demand signals remain strong over the medium term and we continue to believe our volumes of gradually improve as we move through the second half of 2022 at the supply chain challenges facing our customers start to subside.
We continue to pursue significant new business opportunities, we remain ready to increase our production volumes as needed.
The same time, we are investing in the right technologies and facilities that will allow us to successfully address this demand.
That concludes my comments and I will now turn the call back over to Jay.
Thank you Todd I am convinced that Mac is uniquely positioned to help our OEM customers as they streamline their supply chain with re shoring and outsourcing initiatives. We are focused on profitable growth into new platforms.
Margin expansion with the lean initiatives and innovation to drive competitiveness I am very excited about the future of our company now let's open the lines for any questions.
Thank you. Thank you I would like to ask a question. Please press star followed by one on your telephone keypad.
For any reason you'd like to remove that question press star followed by Kim.
Again to ask a question press star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Mig <unk> with Baird. Please go ahead.
Hey, good morning, guys, it's Joe Grabowski on for Mig This morning.
Yeah.
Hey, Joe Good morning, Good morning, Joe.
<unk>.
Jack welcome to Mac I know, it's early days, but I'd be curious to hear more about what attracted to attracted you to the company.
And how your prior experiences prepare you to lead the company.
Well, thank you Joe I'm excited to be here Joe.
Attracted me to the company really our leadership in the in the space.
Industry trends up ratio ring and outsourcing by our OEM customers and the potential for.
Mac to continue to grow and expand into exciting new opportunities in platforms. I have worked over the last 25 plus years I worked in automotive Aero Defense General industrial and many other industries that.
That <unk> currently operates right.
<unk>.
<unk>.
<unk>. Many of these customers that are currently works with in my past as well. So it was a great fit on the manufacturing engineer by training and mechanical engineer by education.
Every time I walk into any of the factories that Mac has right.
I feel really proud of the work we do.
And I look forward to continue to help the company grow and help our customers continue to achieve their goals.
Great again, welcome and we look forward to working with you going forward.
Question for Todd.
Todd.
To date sales are about $275 million.
If we don't that's $550 million, which was $20 million above the high end of the guidance I know theres some seasonality first half versus second half, but just kind of doing that math is there any reason the higher end of the guidance range does it.
Okay.
Good question, Joe and Youll keep in mind fuel prices are a big variance in that range. So when you think of all the first half of the year we have about.
$30 million of material price inflation pass through to our customers. So when you look historically in 2019 compared to 2019, that's driving up the sales dollars without really providing any bottom line performance and then as you look into the second half. The expectation now is that that's still price will continue to come down which that again.
We will have to get that pricing back to our customer in line with our cost there is at risk if that drops further or quicker than we expect that the sales dollars to be a little bit lower which would still keep us in our guidance and if supply chain.
Continue to improve there are still issues out there.
We're not out of the woods on that front, yet, but if that does improve I would say we would be on the higher end of that guidance.
Got it no that makes sense.
And then final question for me kind of along the same lines, but.
EBITDA margin in the quarter was 13% that's the strongest quarterly margin in several years.
Where there any cost pass through pass through drags in the quarter or have you have you caught up on that.
I think from a cost perspective, we're really caught up on we think inflationary pressures we've done a very good job when we sit the good position at the end of the quarter.
Supply chain disruptions at our customer level is driving the volatility in our plant. So there is a little bit of cost rate still continuing in the quarter, even though it did improve a little bit from Q1, but that does drive inefficiencies at the plant. So Gideon at normalized order pattern from our customers will be helpful and keep in mind that.
<unk>, 13% as I noticed there was 150 to 200 basis points of dilution because of material pass through but there is also the inflation and so we've covered that in commercial pricing that also increases sales. It doesn't increase the bottom line. So in a normalized state I feel very good about our progression of 15% adjusted.
<unk>.
Add to that.
Joe we have done.
The team has done a fantastic job.
Fully covering our inflation with price past slide we feel confident in our ability to value sell our products and services to our customers and capture that value through price.
Got it okay I'll leave it there thanks for taking share.
Thank you for your questions.
The next question comes from Larry de Maria with William Blair. Please go ahead.
Hey, Thanks, good morning, everybody.
As it relates to the sublease discussed the finance the financial impact of a little more detail I think you said $1 8 million cost mitigation was that you guys are you back out some of that from adjusted EBITDA and when does that begin and then as a flow and then what's the visibility on filling the other two thirds of Haynesville.
Business.
Yes.
<unk> began at the end of June and it's $1 $8 million of let's say rental income, which is lease cost mitigation annually that begins in the second half of this year again, it's a four year term, we're confident on that filling the other two thirds space.
We begin to ramp up production here in the back half.
This year and we think we'll have meaningful volume in 2023, and we think that that facility could produce in excess of $100 million.
Total capacity at some point dependent.
Dependent on mix in products. So again, we're very we're very pleased with that location. The hiring so far that has been phenomenal as what was expected.
Larry maybe this is Ryan just to add something there I think we've described starting out we are putting some work in there from other facilities just to manage risk and get them on their feet.
As we've talked in the prepared remarks remarks, there are some significant new business opportunities that we've either either already won or are in the process of negotiating.
Something that we discuss today are targeted to go into Hazel Park facilities. So we remain confident in our ability to fulfill.
Fulfill tucows to fill that.
Plant over over the next few years.
Okay. So then can you.
Back into a net number I know you're moving some business from other facilities and youre getting some new wins, but from where we stand now.
10, 20 $30 million in incremental sales that we can already bank on for next year.
Yes, I mean, we.
We're not really guiding anything into next year.
Yet, but I'll say we.
We still have a solid backdrop of market demand and certainly we're evaluating that as we think about what transition so the internal.
I'll say product moves the internal moves of customers those will be a little bit fluid as things settle in over time. So we can't really delineate what would be new business versus transferred from others, but we'll continue to push the new business activities.
Softens or the market stays strong and thats really the throttle for us on getting Haynesville park filled up.
Just to add to that Larry as you know.
The team has done a phenomenal job of pivoting since February to not only put the Haynesville park facility to refocus on our core businesses, but also right lease out about a third and mitigate our rental costs as well. So overall I think we're in really great shape to bring some production inkjet.
His apart in second half of this year I'm continuing to ramp up with new business and core business next year.
Thanks, and then I appreciate that Jack and then rise comments suggest further strength ahead.
And I know you don't give guidance for next year, but just maybe talk high level I mean look for next year truck orders are weakening.
Power sports are consumer oriented which is weakening.
We're seeing some softness so can you talk about maybe some of the puts and takes are you seeing any softness anywhere in and could you still feel do you feel like your core markets will grow.
Grow volume next year.
I mean, as we sit here today, Larry and we're in constant communication with our customers there was.
I will say a slowdown in July orders for commercial truck, but I think we are.
They've been coming off some pretty low orders the months previous to that we're really at a point, where theres about nine months of backlog out there.
Obviously, the Oems have been concerned about price and cost and limited some of the orders they would actually take for 'twenty. Three so I don't know that that one point makes a trend certainly at an overall level.
Inflationary pressures that.
We remain vigilant in reviewing and discussing with our customers, but commercial truck. We'll watch I think that was one point and that certainly doesn't make a trend power sports.
Retail some description of retail softening, but a lot of discussion around inventory being 60% to 70% of pre COVID-19 levels and I'm sure business models will change a little bit.
At some point there'll have to be dealer inventory put back in the pipeline and then <unk>.
You mentioned, yes, that's that's down and I think thats down as expected with the change in interest rates, but we are seeing non res.
As well as oil and gas also start to pick up so I don't I don't know if those will completely offset each other but theres certainly some buffering.
Going on I think as we think about a potential downturn one important thing.
To keep in mind as we cycled through.
I will say the last downturn here.
Big emphasis to that was the amount of inventory that existed at the end customer level and as we talk to our customers and listen to their the way they describe their business inventory today is low and it's dramatically different than the last downturn.
Okay. Thanks, very much for anything but good luck, Jack yes, but your point is well taken.
And we are vigilant and we are watching the demand trends that we're talking to our customers and if we see any.
A softness coming through right, we're prepared to take cost actions and we're prepared to adjust our production schedules to be in line with our customer demand.
Thank you.
Thank you for your questions.
Our next question comes from flat Mis tricky with Citigroup. Please go ahead.
Okay.
Hey, Brian .
Good morning, guys. Thanks for taking my call.
So maybe just Jack I know, it's probably too early to ask you around.
Pacific thoughts on capital allocation plans, but.
Can you talk maybe at a high level, how you approach thinking about capital allocation and what you see as some key capital allocation priorities for the company here in the early days.
Sure.
Todd laid out flat.
<unk>.
We're in the middle of our Big capital spend given the Hazel Park initial investments, but also refocusing hidden park.
Away from our fitness customer right. So that spend continues this year were at a peak.
I would say that there is probably a little bit up.
Given the long lead times of some of these equipment dried there'll be an <unk>.
Leakage into next year on some of these invoices and things like that right. So if we exclude that the way I think about capital allocation, particularly the capital investments rather.
<unk> really are on maintenance replacement.
Per se.
Safety.
And any of the infrastructure investments right, but those are really small for us overall and next chunk of capital investments, we would like to make a readout on automation and smart manufacturing things like that so if we put all of that together that that on a run rate.
<unk> base is has to be much lower than where we are this year right. So the guidance we have provided.
Is significantly higher than what we expect on a run rate basis in the coming years.
And the one comment I'd make there glad as J.
<unk> points historically have always commented that that normal run rate is probably in that $20 million range. So excluding that tail that invoice that Jack spoke to that's really where we think it will be next year from a capital perspective.
Okay and then.
Ill.
Yes, you mentioned capital allocation right now as you might think about more broadly right. We're not prepared to make any further comments on that but as we think about.
Pulling back on some of these high capital spend right.
Been up our balance sheet for potential acquisitions and things like that we are fully focused on cash flow generation and in how we effectively unlevered <unk>.
EBITDA dollars right. So I think we'll continue to work on our fine tuning up our capital allocation for next year.
Okay, that's really helpful color.
And then maybe just as a follow up in terms of.
Shoring activities.
If I heard correctly you highlighted.
Some activity with the power sports customer going next going into next year, but.
Can you just talk more broadly about.
Are you seeing customers actually begin to execute re shoring plans and go out.
Bid.
For help with those activities or is it still more.
And the planning and discussion phase I guess.
The crux of the question is how soon does reassuring begin to be kind of a meaningful growth tailwind.
Correct.
Yes, and reassuring is something we've talked about for a few quarters now and I think I've described it generally is I would definitely say the quotation and the inquiries increase throughout the course of 2022.
We sit here in the mid year point, we are executing.
Supply agreements purchase orders.
With customers. So from our eyes is definitely real thing I mentioned certainly one on the call there has been.
Others with with multiple other customers too. So this is not just a singular.
Isolated event.
It won't really materialize to revenue to us until next year just given.
Lead times of making tooling and inventories that the customers have.
Coming in from offshore, but definitely as we move into 'twenty three there'll be incremental revenues related to new business tied specifically to re shoring activities for us.
Great.
That's helpful. Thanks very much.
Thank you for your questions.
As a reminder, it is star one if you'd like to ask a question that is star one to ask a question. We'll pause briefly ask questions are registered.
There are no questions waiting at this time, so I'll pass the conference back over to Jack <unk>, President and CEO for any further remarks.
In closing I would like to say I am proud of the work accomplished in the first half of the year and excited about the opportunities for growth at Mac and look forward to working with all of you. Thank you for your time today and your continued interest in Max.
Yeah.
That concludes the Mayville Engineering company second quarter 2022 earnings Conference call. Thank you for your participation you may now disconnect your lines.