Q2 2023 Mayville Engineering Company Inc Earnings Call
Hello, and welcome to the Mayville Engineering Company second quarter 2023 earnings call. My name is Alex and I'll be coordinating your call today.
If you would like to register for a question John Thank you and please press star followed by one on your part.
I'd like to hand over to Stefan Neely with polymer advisors.
Please go ahead.
Thank you operator on behalf of our entire team I'd like to welcome you to our second quarter 2023 results conference call.
Leading the call today is <unk>, president and CEO , Jack ready and Todd Butz, Chief Financial Officer.
Today's discussion contains forward looking statements about future business and financial expectations.
Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission, except as required by law, we undertake no obligation to update our forward looking statements.
Further this call will include the discussion of certain non-GAAP financial measures reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at Mec, Inc. Dot com.
Following our prepared remarks, we will open the line for questions with that I would like to turn the call over to Jack.
Thank you Stephanie and welcome to those joining us on the call and webcast. Our second quarter results demonstrated favorable demand conditions across our key end markets together with early benefits of targeted price actions cost discipline and improved asset optimization in recent months we have.
Solid organic sales momentum across key customer accounts, which has supported improved utilization across our operations a key area of focus for our entire leadership team.
Hello, Mdx value creation strategy, Mike has become an increasingly cash generative business focused on targeted commercial expansion within higher value markets improved operational efficiency and disciplined capital allocation for the quarter, we have delivered more than.
$18 million in free cash flow, excluding a onetime deferred compensation payout continuing to position us to fund a combination of organic and inorganic growth investments together with opportunistic open market repurchases of our common equity so that end.
During the second quarter, we repurchased $8 million, what the common equity under our 25 million shares repurchase program with $18 million remaining under the existing authorization as of June 30th in July we closed on our acquisition of mid states aluminum providing.
<unk> with its strategic entry point into high value lightweight materials fabrication positioning Mac to grow our share of wallet with existing accounts, most notably in our commercial vehicle power sports and agriculture end markets, while building leading market positions within emerging.
High potential industries. The integration is moving forward seamlessly with both Mac and MSA teams collaborating to provide our combined customer base with their full lifecycle of on demand solutions that include design engineering and custom fabrication I will discuss the revenue and costs.
Energy opportunities here in more detail shortly.
Demand conditions remained stable during the second quarter near term supply chain disruptions and fixed cost under absorption from new program launches impacted our adjusted EBITDA and <unk>.
At EBITDA market rate.
Fixed costs under absorption at here's the park alone impacted the second quarter, our adjusted EBITDA and adjusted EBITDA margin by $1 4 million and 100 basis points respectively.
Excluding the impact of the Hazel Park ramp up our normalized adjusted EBITDA margin rate was 12%. We currently expect Hazel park to reach full utilization by year end 2024, which based on our current estimates could contribute an additional $15 million to $20 million of annualize.
<unk> EBITDA to our business turning now to the deal off market conditions across our five primary end markets, let's begin with our commercial vehicle market, which represents 47% of our trailing 12 month revenues during the second quarter commercial vehicle revenue increased 2%.
On a year over year basis, driven by strong demand and elevated build rates customer demand requirements continue to indicate slowing demand in the second half of the year and into 2024 as the industry navigates regulatory changes as well as general slowing in economic activity. However.
<unk> build rates for the second half of the year have consistently improved relative to where they were a quarter ago amid resilient macroeconomic conditions. Currently ACD research forecast that class eight vehicle production to increase four 3% year over year in 2020 323.
<unk> hundred 28000 units followed by a 15% decline in 2024.
Supply chain constraints have continued to impact our commercial vehicle customers. This is the only resulted in deferred volumes that will be Delaware in the second half of the year next is the construction and access market, which represented 19, 3% of our trailing 12 month revenues construction and access revenue declined 10.
Percent on a year over year basis in the second quarter, given weaker fundamentals within the residential housing market, which continues to be impacted by the elevated interest rate environment. Our sales during the quarter were also impacted by customer supply chain constraints, while residential construction trends appear to have Charles.
In infrastructure and energy market demand remains stable, we still expect to see demand softness year over year through the remainder of 2023 with the potential for improvement in 2024.
Our sports market represented 16, 6% of our trailing 12 month revenues and increased by 7% on ERO rare basis in the second quarter, we continue to benefit from market share gains, which includes new customer programs, which were partially offset by a cooling in customer discretionary.
Spending.
Given current market conditions, we anticipate customers will seek to bolster demand through rebates and incentives or the course of the current year on balance we see the opportunity to grow our share of wallet in the current year positioning us to drive incremental sales growth in the power sports market, our agriculture market represented 10.
Percent of trailing 12 month revenue and decreased 13% on a year over year basis. During the second quarter. The decrease during the quarter was primarily driven by a decline in small AG equipment demand as large AG continues to be strong. This trend is in line with our expectations as global foods.
Stocks remain tight and crop prices remain elevated while inventory of both the new and used machinery remained slow given elevated crop prices. We believe producer demand will increase in 2023 supporting further large AG equipment demand, which should mitigate the softness in small AG demand.
Oh, the military market represented five 8% of trailing 12 month revenues and increased 66% on a year over year basis in the second quarter, driven by new program wins and bill rate increases our customers have solid contractual backlogs with the U S government and we continue to see good volte.
<unk> based on new vehicle introductions and related programs. However, we foresee volume growth moderating later in the year due to the expected exploration of some legacy projects.
Through the end of the second quarter customer quoting activity and order rates remained strong.
We remain mindful of how quickly the economic activity can change and the potential for a slowdown as we move through the year.
This time, we see no indications of slowing in our customers pace of activity shifting now to an update on our Mdx initiative. During the second quarter. We continued to progress in the implementation of our mdx value creation framework I am pleased to report that we are on track to achieve the objectives, we laid out last.
Paul when we first announced the Mdx initiative, we will provide further details at our inaugural Investor day planned for September , but I would like to highlight a few key updates from this quarter.
<unk> represents a key area of strategic focus for our team as we position <unk> to achieve consistent above market performance throughout the cycle and capitalize on multi year re shoring and outsourcing mega trends among major Oems.
Commercial level, our focus remains on expanding our integrated solution suite within both existing customer accounts together with targeted growth in higher value growing adjacent markets, including clean Tech and energy transition.
Allow me to share some of the commercial milestones we achieved during the second quarter.
During the second quarter, we continued to launch new products and expand our relationship supplying battery thermal management products. This relationship will continue to expand as our customer growth that electric vehicle battery systems.
The significant growth in the power sports market, we had in 2022, particularly with the new customer we expanded further with the new products and we are building momentum through the second half of 2023 with significant launch activity.
Within the second quarter, we made progress on securing additional market share within our large agriculture and construction customer. These new parts were related to next generation products and where one based on our strong engineering efforts during the product development process.
Given the upcoming emissions regulation changes occurring over the coming years, many of our commercial vehicle customers are continuing to develop their next generation products, including battery electric vehicle offerings. We are focused on expanding our market share. During this product changes and we continue to make progress in the.
Quarter four vehicles that will begin production in 2020 for the.
The other pillar of Mdx is commercial excellence, where our focus is to implement strategic and value based pricing models across our customer programs year to date. The teams have been working tirelessly to implement a programmatic pricing model, we have already seen some benefits from these efforts.
The second quarter, but we expect to see pricing benefits ramp up further in the second half of the year.
On the operational excellence front, we have continued our rigorous implementation approach centered around our quarterly President's kaizen.
Supplemented by monthly operational and commercial excellence.
During the second quarter, we completed 36, <unk> with a focus on sustainability of cost saving measures identified.
Overall, our team is tracking to the savings and Kpis target improvements that underpin our 2023 financial expectations, we'll look forward to providing a comprehensive update on these improvements along with multiyear performance targets at our first ever Investor Day next month.
At our Haynesville Park, Michigan facility.
On the commercial expansion front, the second quarter. It was very eventful for us with the announcement of the MSA acquisition, our first since becoming a public company as we announced on July 5th we successfully completed the acquisition on July <unk> and the integration is well underway and on <unk>.
Track to our expectations given the steady demand in our end markets together with improved plant utilization and six months of contributions from the MSA acquisition, we anticipate 100 to 200 basis points of second half adjusted EBITDA margin expansion relative to the first half of the year.
From.
A capital allocation perspective, having completed the MSA acquisition, our primary focus will be on utilizing free cash flow to repay our debt at this time, we intend to reduce net leverage to below two times within the next 18 months.
Given our current forecast, we anticipate strong free cash flow conversion in the second half of 2023 and going into the full year 2024.
As evidenced in the second quarter, our free cash conversion exceeded 75% when excluding a onetime deferred compensation payout and we expect strong conversion to recur in the second half of the year.
While our capital spending year to date has been minimal we expect our total capex for the year will be in the $15 million to $20 million range. Our capital investment strategy remains rooted in pursuing opportunistic investment in equipment that will yield attractive returns on capital and <unk>.
Summary, we delivered on several important strategic milestones during the second quarter consistent with our mdx value creation priorities looking to the second half of the year demand conditions remained stable across our end markets, even as we maintain our price discipline.
The MSA integration is on track, providing Mac customers with an expanded suite of capabilities and integrated solutions that will support our longer term margin expansion targets, we remain committed to.
With the addition of MSA, we are focused on executing a seamless integration and look forward to the growth opportunities that we will be positioned to pursue going into next year with that I will now turn the call over to Todd to review our financial results. Thank you Jack I'll begin my.
Prepared remarks, with an overview of our second quarter financial performance.
Followed by an update on our balance sheet and liquidity.
Total sales for the second quarter increased <unk>, 5% on a year over year basis to $139 million.
Driven by a combination of improved sales volumes and continued price discipline.
Partially offset by lower material price pass throughs to customers.
Excluding the impact of material price pass throughs, our second quarter sales would have increased six 5% on a year over year basis.
Manufacturing margin was $16 $1 million in the second quarter.
As compared to $18 $3 million in the same prior year period.
The decrease was driven by an increase in employee health insurance claims unabsorbed fixed costs associated with project launches.
$500000 impact from a one time field replacement claim and a $700000 decline in scrap income.
Our manufacturing margin rate was 11, 6% for the second quarter of 2023 <unk>.
As compared to 13, 2% for the prior year period the.
The decrease of approximately 160 basis points was due to the reasons just discussed.
When excluding the impact of these items, our manufacturing margin would have been 14, 6% or an increase of 140 basis points as compared to the prior year.
Profit sharing bonuses and deferred compensation expenses increased by $1 5 million to $2 7 million for the second quarter of 2023, primarily driven by lower deferred compensation expense during the prior year period related to fluctuations within the financial markets.
Other selling general and administrative expenses were $7 4 million for the second quarter of 2023.
As compared to $6 4 million for the same prior year period.
The increase was primarily attributable to the $900000 of expenses related to the MSA acquisition.
Which was added back to adjusted EBITDA during the second quarter.
As such we continue to believe that SG&A expenses on a go forward basis will be approximately four five to five 5% of sales interest expense was $2 million with second quarter of 2023 as compared to $765000 in the prior year period due to higher interest rates and higher borrowings under our credit facility.
<unk> do.
Due to the increase in our borrowings at the end of the quarter associated with the MSA acquisition, we expect that our interest expense will be higher on an absolute basis going forward based on our current borrowing rates.
Adjusted EBITDA decreased to $15 3 million versus $18 2 million the same prior year period adjusted.
Adjusted EBITDA margin percent declined by 210 basis points to 11% in the current quarter as compared to 13, 1% for the same prior year period.
The decrease in our adjusted EBITDA margin was due to a $1 $8 million increase in employee health insurance costs, and the $1 $4 million impact of the ramp up of Hazel Park.
Turning now to our statement of cash flows and balance sheet.
Cash flow provided by operating activities. During the second quarter of 2023 was <unk> 2 million as compared to $16 1 million in the prior year period.
The expected decrease in operating cash flow was entirely due to the $17 6 million deferred compensation payout paid to our former Chief Executive officer, excluding the impact of this payout or cash provided by operating activities would have been $17 8 million during the second quarter, an increase of $10.
6% relative to the prior year period.
Our resulting free cash flow conversion rate exceeded 75% and we are projecting to generate an additional $25 million to $35 million and free cash flow in the second half of the year.
Capital expenditures for the second quarter of 2023 for $3 9 million as compared to $13 4 million during the second quarter of 2022% decrease in capital expenditures as a result of the completion of the initial capital investment in the Haynesville Park, Michigan facility, which was finished in the second half of 2012.
Two as of the end of the second quarter of 2023, our net debt, which includes bank debt financing agreement finance lease obligations and cash and cash equivalents with $89 7 million as compared to $79 billion at the end of the second quarter of 2022.
Cash and cash equivalents included in net debt was $90 1 million, which relates to the $90 million of funds held in escrow to fund the MSA acquisition, which closed on July one. Furthermore, as of June 30, our net leverage ratio was one six times. Additionally.
Additionally, as noted in our press release on June 29, we entered into an amended and restated credit agreement that provides for an additional $50 million of availability under our credit facility, while retaining an uncommitted accordion feature of $100 million.
The new credit agreement also allows for a maximum leverage ratio of three five times up from $3, two five times and our previous agreement.
Furthermore, when accounting for the four quarter leverage holiday following an acquisition that takes our total maximum net leverage ratio to four times for the next year.
As we have stated it is our intention to use free cash flow generation to reduce our net leverage ratio to between one five and two times over the next 18 months.
Now turning to our 2023 guidance today, we are increasing our financial guidance for the full year 2023 due to the closing of the MSA acquisition.
For the full year 2023, we expect the following net sales between $580 million and $610 million adjusted EBITDA between $66 million and $71 million and capital expenditures of between $15 million and $20 million.
Our increased financial guidance captures continued steady customer demand and improved plant utilization, resulting in an adjusted EBITDA margin expansion relative to the first half of the year.
In addition to these dynamics and our legacy business. Our increased guidance range includes the expected $30 million to $35 million of incremental revenues and $4 6 million incremental adjusted EBITDA associated with the MSA acquisition.
With that operator that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.
Thank you if you would like to ask a question. Please press star followed by one on the telephone keypad. If you would like to withdraw your question. Please press star followed by two.
When preparing to ask a question please enjoy devices on mutated Luckily.
Our first question comes from Mig <unk> with Baird.
Your line is open.
Hey, good morning, guys, it's trigger boundary on for Mig This morning.
Good morning, Joe.
Hey, good morning, I had a number of questions around guidance just wanted to make sure that I understand it maybe starting with.
Material raw material.
Our price pass throughs, it looks like you're expecting.
A continued drag in the second half, but better than the first half maybe a total of around $6 million in the second half.
Just wanted to confirm that.
I'm calculating that correctly.
Yes.
If youre thinking of that in the right banner year to date, we've had about $17 million of material price pass through relative to the first half of 'twenty two.
Really declined in the second half as we did see steel in the later half of last year already start to come down so that changed from year to year will be less in the second quarter or second half of the year.
Yes.
Okay just wanted to.
Just wanted to point out that.
From a headline perspective.
Even though we show only a half a percent sales improvement in Q2.
Without material pass throughs as you just indicated our revenues are actually up in Q2, six 5%. So I just wanted to drive home the point, sometimes it's at that point can be missed.
In reading.
Our results given the material pass throughs.
Right no definitely understood and then on the EBIT adjusted EBITDA guidance, obviously youre layering in MSA.
But ex MSA.
Maybe you took down the midpoint of the range.
A little bit.
Again, I want to make sure I have that right in.
What caused the mid corn mid point to go down a little bit.
I mean, I wouldn't say that we took down the.
The guidance right.
Probably tightened the range is how I would position that it's simply for a couple of reasons.
As I'm sure you'll have questions around our construction on access segment. Our construction access market continues to be soft as we indicated in prepared remarks.
And some of that volume is missed volume for the year.
Even though we have similar supply chain disruptions with couple of our CD customers. In Q2, we expect that to be picked up in Q3 as customers continue to make up those volumes right. So given some of that.
Just wanted to get ahead of that and then tightened.
<unk> tightened the range a bit.
And.
If.
Our construction access market recovers in the second half, we could still come in towards the higher end of that range.
This point, we are trying to be a little bit more conservative.
And trying to tighten our range for the year.
And Joe.
Good.
When you think of the base business the legacy business without MSA edition of that a lot of that that that those challenges are already occurred in the first half.
And I do want to highlight that we haven't bought a 200 basis point margin improvement on the legacy business as we look into the second half of this year. So.
One of the things we've talked about with the project launches in Haynesville Park and a few other locations those are going to start moving into production, becoming utilizing those assets Mdx continues to gain ground and as Jake said on the call. We have some pricing initiatives as well. So we feel really good about the margin expansion into the back half.
Yes, no I got it.
Okay It looks like.
Maybe assuming around a 12, 5% EBITA margin in the second half with the guidance mid point switches.
An improvement from the first half just a couple of quick questions on MSA and then I'll pass it along.
I believe MSA revenue in 2022 was $86 million youre going to own it for half a year and you're guiding to 33.
33 to 30, I'm, sorry, you're guiding to 30% to $35 million. So maybe just explain kind of the delta between the 86 million last year.
Again half a year, 30% to $35 million.
Yes, so when we.
Began talking to MSA late last year, beginning of this year and we knew coming into 2023 bed revenues were going to be approximately times too right.
Second half revenues were projecting here.
One.
Segment that they were participating in that is the RV market. They had significant sales in 2022, we knew that RV market was going to be down and in fact, they were probably realize almost zero revenues in 2023 from that end market. So.
So we knew that coming in and our intent from the beginning was to use that capacity extra capacity thats going to be available on MSA to drive further sales synergies with our commercial vehicle and our power sports and our AG customers right. So.
That's why we're not concerned about where MSA revenues are in 2023, we expect to gain significant revenue synergies in.
In 2024, and 2020 final and beyond we will provide additional details on those synergies at our Investor day coming up next month.
Got it and last question and I'll pass it on your own to MSA for a little over a month now.
Any initial learnings anything that.
Maybe you didn't expect.
When you told us about the deal back in June .
I can tell you today that since we announced the transaction and close the transaction.
Theyre more times than any other non me well location.
Within our network right given that it's only 30 minutes away from our headquarters.
Every single time, I leave MSA facilities I am more excited.
About MSA and the future of MSA.
And my enthusiasm.
Tenuous to grow every time I talk to the employees.
That came on board with MSA My enthusiasm continues to grow as we continue our sales teams continue to talk to our existing customers and some of the markets I just mentioned so the future for MSA within Mack is bright and I couldnt be prouder of the.
Mac team on the MSA team that came together worked really hard for almost nine months to make this a reality so yes, the future for MSA is bright.
Really excited about it as you can tell from my comments.
Absolutely that sounds great.
Thanks for taking my questions guys. Good luck.
Thanks, Joe.
We now turn to sticking with Citi. Your line is open.
Good morning, guys. Thanks, Thanks for taking my call.
Hi, Todd.
Good morning.
No.
Can you can you talk about.
The conversations that youre, having with customers about their reassuring plants.
And whether youre actually.
Seeing evidence of them moving forward with these plans.
And therefore contributing to growth runway for Matt.
Sure.
I think I know.
Glad if you remember when I came on board about a year ago.
<unk>.
Talked quite a bit about both reassuring and onshore.
So I would sort of capture those trends in one bucket rather than a separate buckets right. So many of our customers.
In power sports and other markets, particularly lower scores.
I'll take that as an example.
They had components that they were producing in.
Asia lets say.
And many of them continue to bring some of those components back into the U S and North America, and we continue to be a beneficiary of those re shoring projects.
We talked even in the prepared remarks, we talked about a customer in power sports that we're winning more business with all of those prove to us that that re shoring trend is real and Mac has been a beneficiary, but at the same time many of the other applications that.
We supply components to our some large applications think for military think of agriculture, our commercial vehicles the components the size and weight and volume of these components are large and they were never made overseas right. So.
That portion of our business continues to be strong and we don't expect to benefit from the re shoring aspect of that but where we are benefiting in those markets is from outsourcing where customers I can give you multiple examples of our customers where they are choosing between in a mate.
By all of those components and as we previously discussed we have a CD customer where we are completely taking lower production of their field teams.
And from one of them.
Manufacturing locations. So we're investing in a significant <unk>.
Production line with significant capital absence facility, where in Q3, we're actually going to launch a brand new fuel tank for one of our large CD customers. That's a complete outsourcing so they're going to rip apart their production line as soon as we're up and running and exit using that component internally right why.
They are doing that and I can give you multiple examples of that outsourcing efforts at our customers' capital is tight resources are tight they would rather choose to deploy their engineers technicians and production associates to next generation products, such as battery electric vehicles and so on so that's that's another area.
Where we're gaining significant share of wallet.
End markets to continue to take all of our business from our customers.
That's right.
Very helpful color I appreciate it and then maybe just one follow up for me on.
Mdx.
Seem very focused and excited around the commercial pricing initiatives you have underway can you talk about.
The specific changes that you're implementing in that commercial pricing initiatives and how you expect those.
Initiatives to structurally impact profitability going forward.
Yes.
Certainly.
At our Investor day, and we'll be able to provide additional color on in more detail, but today, what I can tell you is that in the past ear suddenly in the past six to nine months.
We have.
<unk> done significant number of TPI <unk>, what I call us transactional process improvement guys answered your finger, but that parlance.
Where we have looked at our pricing methodology our pricing.
Frameworks, our pricing processes, we have continuously trying to improve how we not only capture value.
I know for our customers, but also how we capture value for Mac.
Historically, it would have been a cost plus type of pricing, we're on a journey to a value selling pricing right. So what that does is we're not there yet.
<unk> journey I've done that with multiple companies in my past, so that value selling journey.
Value pricing journey, it takes a while but the beginning steps are there.
Disciplined structured programmatic approach to pricing and Thats, probably where we are right now and we have implemented many of those those steps within Mac, we expect to see.
The readout starting in the second half of this year and part of it is preventing leakages alright.
Means.
In stuff passing on a top line, let's say makeup makeup a number 3% right. But then are you really capturing that 3%. Once you net capture rate of that 3% you just pass on that particular customer right. So that's where we found significant opportunities for improvement we continue to plug the holes, we continue to drive our net capture rate to be higher.
And then the second step in that process is really around cost to start thinking about cost to serve right. So if theres a customer acts on a customer why what should be our margin expectations right.
We started layering in things like.
The AAR terms right there are payment terms their complexity of their components. The value addition that we deal with these customers. All of these have been now programmatically put in place show that going forward right. We're much more educated about the value addition, we're providing to our customers how do we.
We capture in terms of value back to Mac right. So I think and I'm really excited about what this body of work can do for Mac long term as I said certainly right. The first basic steps and the foundation has been laid in the first half we expect to see.
Starting in the second half and we expect to continue on the journey of value pricing going forward.
Great. Thanks.
That's helpful. Jack Thanks back in queue. Thank.
Thank you.
Our next question comes from Pet Jackson with Northland Securities. Your line is open.
Good morning. Thank you. So most of my questions have been asked but I have a couple more market oriented ones.
One would be on the construction and access side so.
You yourself commented that you might be hitting which we might be hitting the trough in residential.
For lack of a better term I think caterpillar more or less said the same thing.
Dealt with the residential market at least in North America with stabilizing.
Is that reflected in.
Your view with regards to the second half or we indeed see the residential construction markets stabilize and kind of firm up would that cause a revisit of a change in kind of how you view your markets that'd be my first question.
Yes, that's right Ted I think we are.
It's on slide five in our deck.
Even though the market continues to signal softness so we do think that it is hitting a trough.
We know we are.
Reasonably optimistic that the second half will be a stable market for us.
We have both cut in all construction equipment and access equipment in.
In our end market.
Hi.
I think it's approximately 60 40 split 60% construction and 40%.
Access is how I will describe our split.
And access market I talk.
Talked about our end customer.
<unk> to see supply chain disruptions in their prepared remarks. This week. They said they were probably at about a 75% supplier right how long to describe that so what that meant in Q2 for US was we were planning on hitting.
Higher rate with them, but then they could not keep up with their supply chain.
They took their volumes down that impacted us even though.
Dave maybe bullish on their end market.
And their backlog.
We haven't seen that uptick in their take up rate right.
Through us right. So that's sort of that's why we're being cautious on axis.
And construction Youre, absolutely right I know there are some green shoots in homebuilding.
As we are seeing a tightening the supply of existing homes and builders continue to <unk>.
Planned new permits et cetera, so perhaps the second half might be a.
Period, where we could see some residential construction pick up.
Absolutely will help us.
Similarly, we are like everybody, we're continuing to see potential benefits of Colorado are waiting to see potential benefits of nonresidential construction and infrastructure Bill.
<unk> spending in the market right. So.
Little bit of that optimism for us in the second half, but otherwise right generally speaking, we're watching the trends in that market.
Thanks, and then my next question then I have one more after this is just on the military market substantial growth there disc.
<unk> discussed that some of it was done by new programs some of it by <unk>.
Build rate increases.
You expect volume growth to moderate in second half, but when you kind of strip down and get in there which is what's more important in terms of driving that growth is it the new programs or is it the rate increases and then on the build rate increases I mean would you view the underpinning of that.
To be blunt the war in Ukraine, and the need to replenish military equipment and supplies because of shipment of those products or those.
Vehicles, if you would to the Ukraine conflict.
Yeah. So.
The two major programs, we're on our aim generals Humvee program and Oshkosh was jailed television right. Those are the two main ones we're primarily on.
<unk>.
Have been there.
We have seen a significant increase in how many production rates.
Given the war in Ukraine, and as we've said right depletion of some of the U S inventory, but also a lot.
<unk> brought on to support.
Ukraine War so that.
We're hopeful that they'll continue to impact positively our second half.
And Jay Ltvs will have to watch and see.
We have limited exposure to Jay Ltvs through Oshkosh, but.
Tom.
With the.
With the aim general winning that program right, we expect to be an active supplier two <unk> general.
In the.
Gail <unk> program going forward.
So that could be a 2020 for 2025 impact probably.
At least we're moderating our.
Our growth rates in the second half just to be in a little bit more prudent and cautious not really knowing.
The drawdowns could due to additional production of these military vehicles.
Great that's nice color my.
My last question is just on the MSA acquisition.
The capacity as I recall during the year.
Paul when you did the announcement you said that there was about 30% capacity that was being unutilized at that point.
And my question is pretty simple as looking forward.
How long do you think it will take for you to fill that capacity.
It's a great question, we are actively working to fill that capacity as you can imagine Ted.
One of the reasons why we were so attracted to two MSA is because as a small company MSA could not get on.
Supplier list at any of our CD customers any of our power sports customers et cetera.
The moment, we announced our our transaction the moment, we closed those transactions, we have begun conversations with many of our major brand.
Oems that we're currently on the books with so we're in the process of certifying MSA, there say one simple certification called TF.
That it takes couple of months to get that done we're in the middle of that certification with MSA.
And some of our customers already are working with us directly to get MSA on the list of suppliers to be able to supply aluminum extrusion and fabrications to their end markets. So that process is very active.
As we speak here.
And that might take a few months.
Coupled a few months hopefully by end of this year it will be on some of our customer list that means as new business gets generated MSA will be recipient of those bid packages that caught packages and we will continue to ramp up our bidding for new business at many of our current customers. So I expect 2024.
Two to start seeing.
Some wins and take advantage of existing capacity at MSA.
Great. So I just wanted to finish with a comment to say.
That was very impressive cash flow generation that you all put off this quarter it kind of shows.
What the future holds for Mac and I look at the.
Capacity that you can fill within let's say then Hazelton Tonight Super exciting to see where this business is going to go into 2004 and 2012.
Thank you for the recognition pad really appreciate that we are.
But we're happy to answer any questions on cash flows, but we are very excited about cash flow generation and not only in the second half, but as you said going forward.
No.
Everyone can see our moderating off our capex plans for not only 2023.
Hopefully it's in line with that sort of range going forward and given our potential to continue to drive additional cash flow generation and <unk> initiatives driving working capital reductions driving down our inventories better payment terms.
<unk> with our customers to get our receivables.
In order all of these activities are that would drive continued.
Increased.
Cash flow generation of Mac and that is the story that we're really proud of.
How hard the teams have been working on to generate those cash flows and I am really excited about what that can do to our debt levels, what that can do to reducing our leverage back down to under two within the next 12 to 18 months, So thats where were focused on and again I appreciate you recognizing the potential.
<unk> and upside at Max.
Our final question today comes from Tim Moore with <unk> your.
Your line is open.
Good morning, Tim Thanks, most of my questions good morning.
Most of my questions are already answered, but I have three remaining to pass.
Jack I know you are I don't want to steal your Thunder for your September Investor Day.
Clearly, we can provide more details on the mdx initiatives, but just so I understand for now you expect a 40 to 70 basis points.
Margin boost from Mdx. This year I'm, just trying to think about next year I know, it's maybe too early to.
Answer this but.
Could it be a similar amount of a margin boost next year would that include.
Or exclude the incremental margin boost youre going to get from <unk>.
<unk> Park, reaching its full utilization by the end of next year.
Okay.
Thank you for the question, Tim and obviously, we're not in a position to provide any guidance for next year.
Having said that I think.
That complicated the spec sheet math, you're trying to do we're not there yet, but I think but the line of thinking is right I think we do expect a tailwind from our.
Mdx.
The ramp up in 2024, we do expect a tailwind from our Haynesville Park.
Ramp up next year.
And I think that.
That sort of framework wise for sure. It's a good way to think about it.
No. One has asked the question or maybe you will but I'll answer this prematurely.
And that is we talked about the $100 million of ramp up of revenues and Haynesville part exiting 2024 right.
Question I think people might have is hey, how are you making progress on that front.
Working out well I can tell you we're on track to.
Get close to 'twenty, we said 2025 right in that range of revenues.
Hazel cost this year, we're on track for that but what that doesn't tell the story is that let's call. It approximately $20 million of revenues coming out of the Haynesville. This year that equates to $75 million of revenue pulled ramp right. So the parts were qualifying they will generate $20 million.
Revenue, let me repeat equates to $75 million off of revenues on an ongoing basis at a full ramp so are the $100 million of revenues for Hazel Park seven approximately 70.
$5 million of revenues have been sold on the books today right. So that's what we're starting up right. So all the effort and emphasis on his part.
Is the right emphasis for the company because $75 million of the $100 million sold and were starting that up as we speak right. So I just want to make the point.
No. One has asked me that question so far.
Jack Thanks, Tom I think you kind of beat me to maybe some of my next question with that.
Okay.
I'm wondering just maybe.
How the Onboarding of the battery thermal management customer has gone I know it was delayed essentially for the March quarter into the June quarter and that was for.
Quality assurance reasons.
Is that going now and will most of that being Hazel Park.
Right now most of that will be in his report Tam.
Good memory.
<unk>.
And.
Similar to my comment on Ietf certification for MSA, we are in the process getting the same idea of certification in Heizo Park, and that's been the sort of the.
Hurdle, if you will to get that customer online we're in the final phases.
Getting the customer online on his report, we expect Q3 to be the quarter. When we will start production for that battery electric vehicle component customer.
Great. That's very helpful I'm quite familiar with what Theyre doing but.
On their end.
Lastly.
I think you've kind of alluded to this in some of your opening remarks, I mean, what is the.
On supply chain shortages for your customers I mean, how is that.
Has that narrowed over the past couple of months just I'm just wondering is it.
Same as it was in the March quarter or is it better.
Yes, it's a good question as I alluded to in my earlier remarks, there are two end markets, where we experienced.
Some supply chain disruptions from our customers right. So one is CB.
In the commercial vehicle market two large customers we work with both had.
A decent amount of disruptions so one of them.
<unk> had approximately five base up lined down days during the quarter, what that meant was that shut down their lines. So that they can the Russell and suppliers can just catch up with all the products that they need to get to the assembly line right. So and we and they are back in Q3 and we expect.
That volume to be captured in Q3 stock loss volume. It just delayed volume from Q2, the second TV customer has similar.
Our frame rail issues coming out of one of their suppliers out of Mexico. So they were down and with reduced run rates in Q2 and in fact theyre working in Q3 weekends, and we're supporting them with weakened production Saturday production. So that they can catch up in Q3, right. So those two customers and I'm not concerned about.
It was just a delayed revenues from one quarter or another quarter, we'll catch up on that and with all the headlines on CV market right now the order book seems to be strong.
And.
It's okay for us.
On access in particular right assay as I discussed.
Still.
Cautious on our view of whether our customer can actually catch up.
And the lost volume in Q3, sorry Q2.
<unk> is potentially lost volume for the year and as I said, that's one of the reasons for us to tighten our ranges for the year.
Jack that was terrific color on the commercial vehicle side and helps explain beyond.
The price pass through <unk>, so far.
The top line, but what are you going to recapture that and that's it for my questions.
Thank you Dave I appreciate it.
This concludes our Q&A I'll now hand back to John <unk>, President and CEO for closing remarks.
Well once again, thank you for joining our call as we announced on July 28, we intend to host an investor day on September 14th at our Hazel Park facility in Metro Detroit area, but this event, we look forward to providing a more comprehensive update on our strategy and our expectations for the coming years.
Should you have any questions or be interested in attending the event. Please contact Noel Ryan our Stefan Neely at Vallum on Investor Relations Council. This concludes our call today you may now disconnect.
Ladies and gentlemen, today's call is now concluded. Thank you for your participation you may now disconnect your lines.
Yeah.
Yeah.