Q1 2024 Mayville Engineering Company Inc Earnings Call
Yes.
Good morning, everyone and welcome to the Mayville Engineering company.
Chach: Good morning everyone and welcome to the Mayville Engineering Company first quarter 2024 earnings conference call. My name is Chach, and I'll be your moderator today. All lines will be open during the presentation portion of the call with an opportunity for questions and answers at the end. I'd now like to pass the conference over to your host, Stefan Neely, to begin. Stefan, please go ahead.
Chach: So the 'twenty 'twenty four earnings conference call. My name is chats not be our moderator today, all lines will be needed during the presentation portion of the call. It the opportunity for questions and answers at the end.
Yahoo, Japan: Now I'd like to pass the conference I have at Yahoo, Japan Neely to begin Stefan. Please go ahead.
Stefan Neely: Thank you operator on behalf of our entire team I would like to welcome you to our first quarter 2024 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.
Stefan Neely: Thank you, Operator. On behalf of our entire team, I'd like to welcome you to our first quarter 2024 results conference call. Leading the call today is MECC's President and CEO, Jag Reddy, and Todd Butz, Chief Financial Officer. Today's discussion includes 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 those described in our periodic reports filed with the Securities and Exchange Commission.
Stefan Neely: 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 Exchange Commission, except as required by law, we undertake no obligation to update our forward looking statements.
Stefan Neely: Except as required by law, we undertake no obligation to update our forward-looking statements. Furthermore, 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 MECInc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jack.
Jack: 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.
Stefan Neely: Following our prepared remarks, we will open the line for questions with that I would like to turn the call over to Jack.
Stephan: Thank you, Stephan, and good morning, everyone. Thank you for joining us today.
Jack: Thank you Stefan and good morning, everyone. Thank you for joining us today.
Jack: First quarter was a strong start to the year, what our team one highlighted by robust net sales growth margin expansion and free cash flow generation.
Jack: Our first quarter results continue to reflect the success of <unk>.
Jack: The first quarter was a strong start to the year for our team, one highlighted by robust net sales growth, margin expansion, and free cash flow generation. Our first quarter results continue to reflect the success of our MBX framework and the impact of our culture of continuous improvement. Demand within our end markets remains healthy, supporting organic sales growth while our teams execute on new project startup in our commercial vehicle, power sports, and other end markets.
Jack: Our mdx framework on the impact of our culture of continuous improvement.
Jack: Demand within our end markets remained healthy supporting organic sales growth, while our teams execute on new project startups in our commercial vehicle power sports and other end markets.
Jack: Over the last year, our team has demonstrated measurable progress with sourcing optimization.
Jack: Over the last year, our team has demonstrated measurable progress with sourcing optimization and our labor utilization, resulting in 1.6 million of year-over-year self-help adjusted EBITDA improvement during the first quarter alone. We continue to see significant opportunities to further increase plant utilization while driving improved operating leverage.
Jack: Our labor utilization, resulting in one 6 million or <unk>.
Jack: Year over year self help adjusted EBITDA improvement during the first quarter alone.
Jack: We continue to see significant opportunities to further increase plant utilization.
Jack: While driving improved operating leverage for example at our Hazel Park facility, we expect to achieve $100 million annual revenue run rate by year end 2024, consistent with our prior expectations.
Jack: For example, at our Hazel Park facility, we expect to achieve a 100 million annual revenue run rate by year-end 2024, consistent with our prior expectations. Looking to the remainder of 2024, I am encouraged by the opportunities we see to further improve our commercial reach and operational productivity. However, given broader market volatility, we continue to manage our business with discipline and conservatism.
Jack: Looking to the remainder of 2024 I am encouraged by the opportunities we see to further improve our commercial reach and operational productivity. However, given broader market volatility we continue to manage our business with discipline and conservatism.
Jack: Through this lens of cautious optimism, we anticipate a steady, ratable cadence of growth and margin improvement through the balance of the year, all of which reflects the expected timing of new project starts together with pockets of demand softness in select end markets. With that in mind, we are reiterating our 2024 financial guidance, which projects full-year net sales growth of between 5% and 9% and growth in total free cash flow of between approximately 11 to 21 million when compared to 2023.
Jack: Through this lens of cautious optimism, we anticipate steady ratable cadence of growth and margin improvement through the balance of the year all of which reflects the expected timing of new project starts together with pockets of demand softness in select end markets.
Jack: With that in mind, we are reiterating our 2024 financial guidance, which projects full year net sales growth of between 5% and 9% and growth in total free cash flow of between approximately $11 million to $21 million when compared to 2020.
Jack: Three.
Jack: Turning now to a review of market conditions across our five primary end markets. Let's begin with our commercial vehicle market, which represents approximately 37% of our trailing 12-month revenue. During the first quarter, commercial vehicle revenue decreased by 0.3% on a year-over-year basis. This was primarily due to softening market demand. As ACT Research reported, North American Class VIII production fell 1.9% year-over-year in the first quarter.
Jack: Turning now to a review of market conditions across our five primary end markets.
Jack: Let's begin with our commercial vehicle market, which represents approximately 37% of our trailing 12 month revenues.
Jack: During the first quarter commercial vehicle revenue decreased by <unk>, 3% on a year over year basis. This is primarily due to softening end market demand.
Jack: As ACD research reported North American class eight production fell one 9% year over year in the first quarter.
Jack: Our performance during the quarter reflects softening overall demand in weaker freight markets, as well as a general slowdown in academic activity. However, this was offset by new project launches, which we expect will be a tailwind for MEC through the rest of this year. Currently, ACT Research forecasts Class VIII vehicle production to decrease 10.4% year-over-year in 2024 to 305,000 units. ACT expects build rate declines of nearly 10% during the second quarter and falling to over 15% during the second half of the year.
Jack: Performance during the quarter reflects softening overall demand on weaker freight markets as well as general slowing in the economic activity.
Jack: However, this was offset by new project launches, which we expect will be a tailwind for Mac through the rest of this year.
Jack: Currently ACD research forecast that class eight vehicle production to decrease 10, 4% year over year in 2024 to 305000 units.
Jack: ACD expect build rate declines of nearly 10% during the second quarter and falling to over 15% during the second half of the year for Mac, We expect our new CV project launches to continue ramping into the middle of this year, which.
Jack: For MAC, we expect our new CV project launches to continue ramping into the middle of this year, which will help us maintain comparable sales to this end market relative to 2023. It is also worth highlighting that ACT currently expects Class A production to recover in 2025, growing 5.1% compared to 2024, with continued growth of 8.1% from 2025 to 2026, which supports our organic growth expectations over the next two years. Next is the construction and access market, which represented approximately 18% of our trailing 12-month revenues. Construction and access revenues increased 7.3% on a year-over-year basis in the first quarter.
Jack: It will help us maintain comparable sales to this end market relative to 2023.
Jack: It is also worth highlighting that ACD currently expect class eight production to recover in 2025 growing five 1% compared to 2024 with continued growth of eight 1% from 2025 to 2026, which supports our.
Jack: <unk> growth expectations over the next two years.
Jack: Next is the construction and access market, which represented approximately 18% of our trailing 12 month revenues construction and access revenues increased seven 3% on a year over year basis in the first quarter.
Jack: This reflects steady demand in non-residential and public infrastructure markets, which more than offsets softness within residential markets. We expect this trend to continue through 2024, supporting our overall outlook for flat net sales to this end market, supported by the demand from infrastructure-related projects and new customer wins. The power sports market represented approximately 17% of our trailing 12-month revenues and increased by 25.7% on a year-over-year basis in the first quarter.
Jack: This reflects the steady demand in non residential and public infrastructure markets, which more than offset softness within residential markets.
Jack: We expect this trend to continue through 2020 for supporting our overall outlook for flat net sales to this end market supported by the demand from infrastructure related projects and new customer wins.
Jack: The power sports market represented approximately 17% of our trailing 12 month revenues and increased by 25, 7% on a year over year basis in the first quarter.
Jack: We continue to benefit from market share gains, which include new customer programs on high-end models, and we're modestly offset by a cooling in customer discretionary spending. We continue to expect growth in net sales to this end market to moderate somewhat through the year, but still remain positive compared to 2023 due to the momentum from market share gains. Our agricultural market represented approximately 10% of trailing 12-month revenues and increased 3.5% on a year-over-year basis during the first quarter.
Jack: We continue to benefit from market share gains, which include new customer programs on high end models and were modestly offset by a pooling in customer discretionary spending.
Jack: We continue to expect growth in net sales to this end market to moderate somewhat through the year, but still remain positive compared to 2023 due to the momentum from market share gains.
Jack: Our agricultural market represented approximately 10% of trailing 12 month revenues and increased three 5% on a year over year basis during the first quarter.
Jack: Our first quarter results for this end market reflect market share growth and contributions from the MSA acquisition offset by softening demand within large ag and turf markets. As we move through the year, we expect that new project wins will continue to firm up any potential softness in this end market. As you will recall, we acquired mid-stage aluminum at the beginning of the third quarter of 2023, and as of the beginning of this year, MSA has been fully integrated into the MEC platform.
Jack: Our first quarter results for this end market reflect market share growth and contributions from the MSA acquisition.
Jack: Offset by softening demand within large AG and turf markets.
Jack: As we move through the year, we expect that new project wins will continue to firm up any potential softness in this end market.
Jack: As you will recall, we acquired mid states aluminum at the beginning of the third quarter of 2023 and as of the beginning of the current year.
Jack: MSA has been fully integrated into the <unk> platform.
Jack: During the first quarter, revenues associated with MSA drove 9.8% of our top-line growth year-over-year, with the majority of these revenues being in our other end markets. For 2024 as a whole, we continue to see MSA generating between 20 to 30 million of incremental net sales with revenue synergies beginning to ramp up in the second half of the year. On the commercial front, our sales team continues to have success, cross-selling MSA's capability. We have earned multiple supplier codes from legacy MEC customers, and our code pipeline continues to grow, with multiple strategic projects being negotiated. On the pricing front, our commercial team has been working tirelessly over the last year to implement our programmatic value-based pricing model.
Jack: During the first quarter revenues associated with MSA drove nine 8% of our topline growth year over year with the majority of these revenues being in our other end market.
Jack: For 2024 as a whole we continue to see MSA generating between $20 million to $30 million of incremental net sales with the revenue synergies beginning to ramp up in the second half of the year.
Jack: On the commercial front, our sales team continues to have success cross selling msa's capabilities.
Jack: We have earned multiple supplier codes from legacy <unk> customers and our core pipeline continues to grow with multiple strategic projects being negotiated.
Jack: On the pricing front, our commercial team has been working tirelessly over the last year to implement our programmatic value based pricing model.
Jack: During the first quarter, we continued to see the fruits of these efforts as commercial pricing initiatives net of inflationary pressures yielded zero point $8 million in year over year, adjusted EBITDA growth, particularly as new project volumes come online we expect to see continued.
Jack: During the first quarter, we continued to see the fruits of these efforts as commercial pricing initiatives met inflationary pressures yielded $0.8 million in year-over-year adjusted EBITDA growth. Particularly as new project volumes come online, we expect to see continued margin expansion from our pricing initiatives through the rest of the year. A few substantial new wins during the first quarter include the following.
Jack: Margin expansion from our pricing initiatives through the rest of the year.
Jack: A few substantial new wins during the first quarter include the following we were able to win significant content with one of our top military customers for the <unk> TV product line expecting incremental growth during the program transition between Oems.
Jack: We were able to win significant content with one of our top military customers for the JLTB product line, expecting incremental growth during the program transition between OEMs. During the first quarter, we continued to expand share with one of our key PowerSports customers supporting their next generation product lines, as well as expansion into some of their other product offerings. These wins support additional growth over the next two years, and we expect further organic and cross-selling opportunities in the quarters ahead.
Jack: During the first quarter, we continued to expand share with one of our key power sports customers supporting their next generation product lines as well as expansion into some of their other product offerings. These wins support additional growth over the next two years.
Jack: And expect further organic and cross selling opportunities in the quarters ahead.
Jack: In the quarter, we expanded share within our primary EV customer related to battery thermal management products, which continues to be driven by our available capacity at Hazel Park. Additionally, during the quarter, we received significant awards for engine tube products with multiple customers driven by expected regulatory emissions changes that will be occurring in the years ahead.
Jack: In the quarter, we expanded share within our primary EV customer related to battery thermal management products, which continues to be driven by our available capacity at Hazel Park.
Jack: During the quarter, we received a significant awards for engine two products with multiple customers driven by expected regulatory emissions changes that will be occurring in the years ahead.
Jack: We have continued to gain additional market share as our commercial vehicle customers plan for their vehicle updates, both on next-generation products and battery electric vehicle platforms. We expect to continue to grow market share over the next two years with the amount of change that will occur in this industry. As I mentioned earlier, our operations team has been very focused on sourcing optimization, improving labor utilization, and improving overall inventory efficiency. These initiatives have been driven by our rigorous approach to MBX Lean Implementation, highlighted by over 150 MBX Kaizen events since launching the MBX program in late 2022.
Jack: We have continued to gain additional market share as our commercial vehicle customers plan for their vehicle updates both on next generation products and battery electric vehicle platforms. We expect to continue to grow share over the next two years with the amount of change that will occur in this industry.
Jack: As I mentioned earlier, our operations team has been very focused on sourcing optimization, improving labor utilization and improving overall inventory efficiency.
Jack: These initiatives have been driven by our rigorous approach to mdx lean implementation highlighted by over 150, Mdx kaizen events since launching the Mdx program in late 2022.
Jack: In summary, the execution of our commercial and operational excellence initiatives remain on track and we are confident in our ability to recognize near and long term benefits from these various self help initiatives.
Jack: In summary, the execution of our commercial and operational excellence initiatives remains on track, and we are confident in our ability to recognize near and long-term benefits from these various self-help initiatives. Recall that by the year end 2026, we expect to deliver between 750 and 850 million in revenues, expand adjusted EBITDA margin to between 14% and 16%, and generate free cash flow of between 65 and 75 million. Given our strong strategic execution on the current multi-year demand outlook, we remain confident in our ability to achieve these targets.
Jack: Recall that by the year end 2026, we expect to deliver between 750 and $850 million in revenues expand adjusted EBITDA margin to between 14% and 16% and generate free cash flow of between 65 and 70.
Jack: $5 million.
Jack: Given our strong strategic execution and the current multiyear demand outlook, we remain confident in our ability to achieve these targets in terms of capital allocation, we remain very focused on aggressively reducing our outstanding borrowings to achieve our previous.
Jack: In terms of capital allocation, we remain very focused on aggressively reducing our outstanding borrowings to achieve our previously stated goal of a net leverage ratio of between one and a half times and two times by the end of 2024. Given the strong free cash flow generation during the first quarter, we were able to reduce our net leverage to 1.98 times.
Jack: <unk> stated goal of a net leverage ratio of between one five times and two times by the end of 2024.
Jack: Given the strong free cash flow generation during the first quarter, we were able to reduce our net leverage to 1.98 times going forward in the year. We remain committed to continued debt repayment with free cash flow generation as our top priority for cash.
Jack: Going forward in the year, we remain committed to continued debt repayment with free cash flow generation as our top priority for capital deployment. In addition, we are also continuing to evaluate opportunistic share repurchases under our existing $25 million authorization. Strategic M&A remains a key part of our multi-year growth and business transformation strategy as we look to expand our capabilities to meet the rapidly growing demand for lightweight material fabrication. As we are able to achieve our targeted net leverage levels, we will be selective in pursuing creative M&A that continues to build on our market-leading capabilities and positions the company to further capitalize on multi-year secular growth trends in energy transition and OEM outsourcing.
Jack: <unk> deployment.
Jack: In addition, we are also continuing to evaluate opportunistic share repurchases under our existing $25 million authorization.
Jack: Strategic M&A remains a key part of our multiyear growth and business transformation strategy as we look to expand our capabilities to meet the rapidly growing demand for lightweight materials fabrication.
Jack: As we are able to achieve our targeted net leverage levels, we will be selective in pursuing accretive M&A that continues to build on our market leading capabilities and positions. The company to further capitalize on multiyear secular growth trends in energy transition.
Jack: And OEM outsourcing in summary, I am very proud of our team's ongoing commitment to excellence and strategic execution, we have come a long way as an organization over the last 18 months I continue to expect that our execution positions us well for rail.
Jack: In summary, I am very proud of our team's ongoing commitment to excellence and strategic execution. We have come a long way as an organization over the last 18 months. I continue to expect that our execution positions us well for rateable growth for the remainder of 2024 and above market growth as we move through the cycle. With that, I will now turn the call over to Todd to review our financial results.
Jack: <unk> growth for the remainder of 2024 and above market growth as we move through the cycle with that I will now turn the call over to Todd to review our financial results.
Todd: Thank you Jack.
Todd M. Butz: I'll begin my prepared remarks with an overview of our first quarter financial performance, followed by an update on our balance sheet and liquidity. Total sales for the first quarter increased 13.1% on a year-over-year basis to $161.3 million. This increase was driven by a combination of the MSA acquisition and improved organic sales volume, although partially offset by expected softening demand and our legacy agriculture and market and the expected fall off of certain military aftermarket programs at the end of 2023.
Todd: I'll begin my prepared remarks, with an overview of our first quarter financial performance.
Todd M. Butz: Led by an update on our balance sheet and liquidity.
Todd M. Butz: Total sales for the first quarter increased 13, 1% on a year over year basis to $161 $3 million. This increase was driven by a combination of the MSA acquisition and improved organic sales volumes.
Todd M. Butz: Partially offset by expected softening demand in our legacy agriculture end market and the expected fall off of certain military aftermarket programs at the end of 2023.
Todd M. Butz: When excluding the MSA acquisition, organic net sales growth was 3.3% year-over-year. Our manufacturing margin was $20.9 million in the first quarter, as compared to $16.4 million in the same prior year period. The increase was primarily driven by increased organic volumes, MBX, commercial pricing initiatives, and the acquisition of MSA. Our manufacturing margin rate was 13% for the first quarter of 2024, as compared to 11.5% for the prior year period, for an increase of 150 basis points. Other selling, general, and administrative expenses were $7.8 million for the first quarter of 2024, as compared to $7 million for the same prior year period. The increase was primarily driven by an additional $0.3 million of legal expenses related to our former fitness customer and additional costs related to the acquisition of MSA. Increased costs related to compliance requirements. Annual Wage Inflation
Todd M. Butz: When excluding the MSA acquisition.
Todd M. Butz: <unk> net sales growth was three 3% on a year over year basis.
Todd M. Butz: Our manufacturing margin with $29 million in the first quarter as compared to $16 4 million in the same prior year period. The increase was primarily driven by increased organic volumes mdx commercial pricing initiatives and the acquisition of MSA.
Todd M. Butz: Our manufacturing margin rate was 13% for the first quarter of 2024 as compared to 11, 5% for the prior year period for an increase of 150 basis points.
Todd M. Butz: Other selling general and administrative expenses were $7 8 million for the first quarter of 2024.
Todd M. Butz: As compared to $7 million for the <unk>.
Todd M. Butz: Same prior year period.
Todd M. Butz: The increase was primarily driven by an additional $3 million of legal expenses related to our former fitness customer.
Todd M. Butz: Incremental costs related to the acquisition of MSA.
Todd M. Butz: Increased costs related to compliance requirements and annual wage inflation.
Todd M. Butz: Interest expense was $3 4 million for the first quarter of 2024.
Todd M. Butz: Interest expense was $3.4 million for the first quarter of 2024, as compared to $1.7 million in the prior year period due to higher interest rates and higher borrowings under our credit facility. The increase in borrowings is due to the acquisition of MSA, which closed on July 1, 2023.
Todd M. Butz: As compared to $1 7 million in the prior year period, due to higher interest rates and higher borrowings under our credit facility.
Todd M. Butz: The increase in borrowings is due to the acquisition of MSA, which closed on July one 2023.
Todd M. Butz: We continue to expect debt reduction during 2024, which may provide for further interest rate step downs as we achieve our net leverage goal of between one and a half to two times by year end.
Todd M. Butz: We continue to expect debt reduction during 2024, which may provide for further interest rate step-downs as we achieve our net leverage goal of between one and a half to two times by year end. The adjusted EBITDA increased to $18.5 million versus $13.8 million for the same prior-year period. It's just that even a margin percent increased by 180 basis points to 11.5% in the current quarter as compared to 9.7% for the same prior year period. The increase in our adjusted EBITDA margin was primarily due to increased organic volumes, the MSA acquisition, MBX initiatives, and the benefit from our commercial pricing activity.
Todd M. Butz: Adjusted EBITDA increased to $18 5 million versus $13 8 million for the same prior year period.
Todd M. Butz: The EBIT margin percent increased by 180 basis points to 11, 5% in the current quarter as compared to nine 7% for the same prior year period.
Todd M. Butz: The increase in our adjusted EBITDA margin was primarily due to the increased organic volumes MSA acquisition mdx initiatives and the benefit from our commercial pricing activities.
Todd M. Butz: Our first quarter results demonstrate the continued progress towards our 2026 Adjusted Evenum Margin goal of 14 to 16 percent. Turning now to our statement of cash flows and the balance, free cash flow during the first quarter of 2024 was a positive $7.9 million, as compared to a negative $8.5 million in the prior year period. The improvement in free cash flow year-over-year was primarily due to the $14.3 million increase in cash from net working capital. The progress of our MDX program can be seen in many parts of our financial statements. On a year-over-year basis, direct MBX savings generated 100 basis points of manufacturing margin improvement.
Todd M. Butz: Our first quarter results demonstrate the continued progress towards our 2026, adjusted EBITDA margin goal of 14% to 16%.
Todd M. Butz: Turning now to our statement of cash flows and the balance sheet.
Todd M. Butz: Free cash flow during the first quarter of 2024 was a positive $7 9 million as compared to a negative $8 5 million in the prior year period.
Todd M. Butz: Improvement in free cash flow year over year was primarily due to the $14 $3 million increase in cash from net working capital.
Todd M. Butz: The progress of our Mds program can be seen in many parts of our financial statements.
Todd M. Butz: On a year over year basis, direct mdx savings generated a 100 basis points of manufacturing margin improvement.
Todd M. Butz: And the team's lean focus has improved our working capital re-cash flow by $14.3 million and has allowed us to increase the capacity and utilization of existing assets. Please note that we continue to expect our full-year NBX savings to be between $2 million and $4 million as the year-over-year comparisons moderate throughout the year. As of the end of the first quarter of 2024, our net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents, was $142.8 million, as compared to $83.7 million at the end of the first quarter of 2023, and resulted in a net leverage ratio of 1.98 times as of March 31st.
Todd M. Butz: And the team lean focus has improved our working capital free cash flow by $14 $3 million and has allowed us to increase the capacity and utilization of existing assets.
Todd M. Butz: Please note that we continue to expect our full year <unk> savings to be between 2 million and $4 million at the year over year comparisons moderate throughout the year.
Todd M. Butz: As of the end of the first quarter of 2024, our net debt, which includes bank debt financing agreements finance lease obligations and cash and cash equivalents was $142 8 million as compared to $83 7 million at the end of the first quarter of 2023 and resulted.
Todd M. Butz: And a net leverage ratio of 198 times as of March 31.
Todd M. Butz: In light of our first quarter result, and our current outlook for the rest of the year, we are reiterating our financial guidance for the full year 2024.
Todd M. Butz: In light of our first quarter result and our current outlook for the rest of the year, we are reiterating our financial guidance for the full year 2024. For 2024, we continue to expect the following. Net sales of between $620 million and $640 million; adjusted EBITDA of between $72 million and $76 million. Free cash flow of between $35 million and $45 million. The assumptions behind our risk-adjusted guidance for the year are also unchanged and reflect organic growth of between 1.5% and 2.5% due to the new project launches, including the ramp-up of Hazel Park, offset by expected end-of-life projects and slowing of macroeconomic demand in a few of our end markets. With that, Operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session. Thank you, Todd.
Todd M. Butz: For 2024, we continue to expect the following.
Todd M. Butz: Net sales of between $620 million $640 million.
Todd M. Butz: Adjusted EBITDA of between $72 million and $76 million.
Todd M. Butz: Free cash flow of between $35 million and.
Todd M. Butz: <unk> $45 million.
Todd M. Butz: The assumptions behind our risk adjusted guidance for the year are also unchanged and reflects organic growth of between one five and two 5% due to the new project launches, including the ramp up of Hazel Park.
Todd M. Butz: Offset by expected end of life projects and slowing that macro economic demand and a few of our end markets.
Speaker Change: With that operator that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.
Operator: Thank you, Todd. If you'd like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. When preparing to ask a question, please ensure your device is unmuted locally. The first question comes from Meg Dobre from Baird. Please go ahead.
Speaker Change: Thank you Todd if you'd like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by <unk>.
Mircea Dobre: I wanted to ask a question. Please ensure your device is unmated lately.
Mircea Dobre: The first question comes from Mig <unk> from Baird. Please go ahead.
Mircea Dobre: Hey, good morning, guys, it's Joe Grabowski on for Mig This morning.
Joseph Michael Grabowski: Hey, good morning, guys. It's Joe Grabowski on for MIG this morning. Morning, all. Hey, good morning. So I guess my first question, 3% organic sales growth in the first quarter, maybe how does that break down between, you know, you've got Hazel Park ramping up, you've got new customer and project wins, but then maybe some end market headwinds, how does the kind of the moving pieces split out to get to the 3% organic sales growth? What do you have in the first quarter?
Speaker Change: Good morning, Joe.
Speaker Change: Hey, good morning.
Joseph Michael Grabowski: My first question.
Joseph Michael Grabowski: Organic sales growth in the first quarter, maybe how does that breakdown between your non U.
Joseph Michael Grabowski: Scott.
Joseph Michael Grabowski: He is a park ramping up you got you.
Joseph Michael Grabowski: Customer and project wins.
Joseph Michael Grabowski: Maybe some.
Joseph Michael Grabowski: And market headwinds.
Joseph Michael Grabowski: Kind of the moving pieces.
Joseph Michael Grabowski: Split out to get to 3%.
Joseph Michael Grabowski: <unk> sales correctly in the first quarter.
Unknown Executive: Thanks, Joe. Yeah, so when you look at the 3% organic growth, you know, a big driver that certainly is a continued strong CV market relative to the last year. And then power sports wins, we really started launching those in the back, you know, the fourth quarter of last year, and we've seen the benefit of it. And you can see that, you know, a pretty significant year over year, incremental lift in sales as it relates to power sports of, you know, 25 plus percent in the quarter versus last year.
Speaker Change: Thanks, Joe.
Joseph Michael Grabowski: So when you look at the 3% organic growth.
Unknown Executive: Big driver of that certainly is a continued strong CV market relative to last year.
Unknown Executive: And then power sports wins, we really start to launch <unk> in the back the fourth quarter of last year, and we've seen the benefit of it and you can see that.
Unknown Executive: The significant year over year incremental lift in sales as it relates to power source of 25 plus percent in the quarter versus last year. So it's really a new project wins and the market itself is kind of behaving or as we had expected in the first quarter. So it wasn't many surprises that occurred in.
Unknown Executive: So, you know, it's really new project wins, and the market itself is kind of behaving or as we'd expected in the first quarter. So there weren't many surprises that occurred. And, in fact, I think things are, as we look forward, are really shaping up as we expected when we came out with guidance, you know, just a few months ago.
Unknown Executive: Back I think things are as we look forward are really shaping up as we expected when we came out with guidance just a few months ago.
Unknown Executive: Yeah, just to add to that, Joe, the CV market, as you know, is expected to be down over 10% this year. It's a huge testament to our commercial team and our operations teams that, you know, we're basically flat at CV in Q1, worse than a market decline of 10%, right, for the year, right? Similarly, power sports, as Todd mentioned, our significant wins and startup, and ramp-ups in power sports are continuing to propel our sales forward in the quarter.
Speaker Change: Yes, just to add to that Joe.
Unknown Executive: <unk> CV market <unk> is expected to be down over 10% this year.
Unknown Executive: It's a huge testament to our commercial team and our operations teams that were basically flat in CV in Q1.
Unknown Executive: So say market decline of 10% for the year right. Similarly power sports as Todd mentioned, our significant wins and.
Unknown Executive: Startups and ramp ups in power scores are continuing to propel our sales forward in the quarter.
Speaker Change: Great and maybe I'm going to ask.
Unknown Executive: Great. And maybe I'm going to ask a similar question for the remainder of the year. Your assumption is that organic sales moderate a little bit in the final three quarters of the year but stay positive, you know, in aggregate over the three quarters. So, again, as you look through the remainder of the year, how much do new project wins and Hazel Park offset maybe some, as you mentioned in the slide deck, some selective softening of end markets? Yeah,
Unknown Executive: Similar question for the remainder of the year.
Unknown Executive: Sure.
Unknown Executive: Is it organic sales moderate a little bit.
Unknown Executive: The final three quarters of the year, but.
Unknown Executive: Stay positive.
Unknown Executive: In aggregate over the three quarters so.
Unknown Executive: Again, if you look through the remainder of the year.
Unknown Executive: How much did new project wins in here for park.
Unknown Executive: Maybe some.
Unknown Executive: As you mentioned in the slide deck.
Unknown Executive: Our collective thoughts.
Unknown Executive: Our end markets.
Unknown Executive: Yes.
Speaker Change: I think that AG market Essent.
Unknown Executive: I think that, you know, the ag market, as an example, right, that demand in that market continues to be fluid. We do expect that uncertainty to continue the rest of the year. In terms of power sports, we feel pretty good about the trajectory of the ramp.
Unknown Executive: As an example, right that demand in that market continues to be fluid.
Unknown Executive: We do expect that uncertainty to continue rest of the year.
Unknown Executive: In terms of power sports, we are we feel pretty good about the trajectory of that ramp.
Unknown Executive: And similarly in access and.
Unknown Executive: And similarly, in access and construction, mostly it's access that we're seeing a good uptick in demand, and construction continues to be driven by mostly non-residential and infrastructure demand, even though residential continues to be soft, right? So given all those dynamics, right, you know, we feel pretty good about these end markets for CV in particular. We expect CV to soften somewhere as a market in the middle of the year and pick back up in Q4 as an end market. But given our product launches and ramp-ups throughout the year, we continue to expect it to remain flat to last year in the CV end market.
Unknown Executive: On construction, mostly its access that we're seeing a good uptick in demand.
Unknown Executive: And construction continues to be driven by.
Unknown Executive: Mostly non residential and infrastructure demand, even though the residential continues to be soft right. So given all those dynamics right, we feel pretty good about.
Unknown Executive: These end markets for CV in particular, we expect see.
Unknown Executive: <unk> two softened somewhere at a market in the middle of the year and picked back up in Q4 and market, but given our product launches and ramp ups throughout the year, we continue to expect to remain flat.
Unknown Executive: Two last year in the CV and market.
Speaker Change: Okay, and then if I could sneak in one more on the EBITA margin.
Unknown Executive: Okay, and then if I could sneak in one more on EBITDA margin, really nice EBITDA margin from MSA. It looks like from the waterfall, maybe, you know, mid-20% EBITDA margin from MSA. If you back out MSA, maybe 40, 50 basis points of year-over-year EBITDA margin improvement. So maybe any headwinds in the quarter that maybe limited the core EBITDA margin expansion that maybe, you know, will dissipate as we progress through the year.
Unknown Executive: Really nice EBITDA margin from MSA, it looks like from a waterfall maybe.
Unknown Executive: Mid 20% EBITDA margin from MSA, Okay. If you back out MSA, maybe 40 50 basis points of here.
Unknown Executive: Year over year margin improvement.
Unknown Executive: Any kind.
Unknown Executive: Any headwinds in the core in the quarter.
Unknown Executive: Maybe limited.
Unknown Executive: The core EBIT margin expansion maybe.
Unknown Executive: Maybe.
Unknown Executive: Anticipated.
Unknown Executive: For the year.
Unknown Executive: I wouldn't call that any headwinds in remaining non-MSA core businesses. Also, let me remind you that MSA is fully integrated, right? So, yes, we're calling it out separately as we roll through the second quarter, right?
Unknown Executive: I wouldn't call that any headwinds and remaining non MSA our core businesses.
Unknown Executive: Also let me remind you that MSA is fully integrated right. So I guess, we're calling it out separately.
Unknown Executive: It all to the second quarter right now.
Unknown Executive: Then we'll lap that and then we'll continue to show our remaining core business margin expansion, Yes, MSA had a fantastic Q1, no doubt about that at the same time every single one of our other <unk>.
Unknown Executive: Then we'll lap that, and then we'll continue to show remaining core business margin expansion. Yes, MSA had a fantastic Q1, no doubt about that. At the same time, right, every single one of our other parts of the business continued to show margin progression. Even Hazel Park, right, it was a slight headwind in Q1, but that's much better than the last couple of quarters and last year. Hazel Park continued to get better, and the rest of the businesses continued to expand their margins. Sitting here, right, we feel very good about our core business and how we're performing and how we continue to expand margin and remain on track to our 14% to 16% margin target in the coming years.
Unknown Executive: Parts of the business continued to show margin progression.
Unknown Executive: Even Hazel Park right, yes, it was a slight headwind in Q1, but that's much better than last couple of quarters last year, we continue Hays.
Unknown Executive: Hazel Park to continue to get better rest of the businesses continue to expand margin.
Unknown Executive: Sitting here right, we feel very good about our core business and how we're performing and how we continue to expand margin and remain on track to our 14% to 16% margin targets in the coming years.
Speaker Change: Got it okay. Thanks, and good luck in the quarter.
Unknown Executive: Got it. Okay. Thanks, and good luck in the quarter.
Speaker Change: Thank you Joe.
Speaker Change: The next question is from <unk> <unk> from Citigroup. Please go ahead.
Operator: The next question is from Vlad Bystricky from Citigroup. Please go ahead.
Vladimir Benjamin Bystricky: Morning, Lex. Morning, Diane. Good morning, guys. Thanks for taking my call.
Vladimir Benjamin Bystricky: Good morning, Good morning, Brian.
Vladimir Benjamin Bystricky: Good morning, guys. Thanks for taking my call and thanks for all color here today.
Unknown Executive: And thanks for all the color here today. I thought the commentary and updates around the value-based pricing initiatives were quite positive. So can you talk about, you know, is there a way to think about how much of your overall portfolio today has made that transition to value-based pricing and sort of the runway that you see for, you know, continued value-based pricing? tailwinds going forward, if you will.
Unknown Executive: Firstly <unk>.
Unknown Executive: Commentary.
Unknown Executive: And updates around the value based pricing initiatives.
Unknown Executive: We're quite positive so can.
Unknown Executive: Can you talk about is there a way to think about how much of your overall portfolio. Today has made that transition to value based pricing and sort of the runway that you see for continued value based pricing.
Unknown Executive: Tailwind going forward, if you will.
Speaker Change: Yes, I would say it.
Unknown Executive: Yeah, I would say it really took root probably mid to third quarter of last year, where we started really implementing it. It took us a while to get going, to be honest.
Unknown Executive:
Unknown Executive: Really took root probably.
Unknown Executive: Mid to third quarter of last year, where we started really implementing that took us a while to get going and to be honest. So I would say that in the last six months or so right every new program win.
Unknown Executive: So I would say that, you know, in the last six months or so, right, every new program win would be under that framework. So you know, a lot of those wins, right? We haven't really started producing those products, right? So we haven't really seen that impact on our margin profile. So what that means is, less than 5%, I would say, or maybe 10 at max, right, is under that framework. It'll take some time for the rest of the business to catch up to that framework, right?
Unknown Executive: Would be under that framework.
Unknown Executive: So.
Unknown Executive: Lot of those wins right, we haven't really started producing those products right. So that means we haven't really seen that impact in our margin profile. So what that means is less than 5% I would say are maybe 10 at Max right under that framework.
Unknown Executive: It will take some time for rest of the business to catch up to that framework right.
Unknown Executive: These are annual wins, right, that will continue to happen, and maybe it takes a couple of years for us to continue to implement that value-based pricing framework across our portfolio. Having said that... For 2024, we expect, you know, 1 to 2 million in pricing, price capture, net of inflation, right? So it's a really good start, net of inflation, 1 to 2 million in this environment. It's a pretty good start for us on that journey. And I expect that to continue to get better as we go along.
Unknown Executive: These are annual wins right.
Unknown Executive: That will continue to lap.
Unknown Executive: And maybe it takes a couple of years for us to continue to.
Unknown Executive: Implement value based pricing framework across our portfolio, having said that.
Unknown Executive: For 2024, we expect.
Unknown Executive: $1 million to $2 million.
Unknown Executive: Pricing price capture a net of inflation right. So it's a really good start net of inflation one to 2 million in this environment.
Unknown Executive: It's a pretty good start for us.
Unknown Executive: That journey and I expect that to continue to get better as we progress.
Unknown Executive: Okay.
Unknown Executive: That's that's really helpful. I appreciate it. And then
Unknown Executive: Really helpful color I appreciate it and then.
Unknown Executive: Just.
Unknown Executive: Just on the capital allocation side. Can you talk about the 7 to 10 million investment in, you know, the high return capital light growth advancements that you've called out on the slide? Can you give some examples of what these investments entail and how we should think about the potential pace of these kinds of investments looking beyond 2024?
Unknown Executive: On the capital allocation.
Unknown Executive: Syed.
Unknown Executive: Can you talk about the $7 million to $10 million of an investment in.
Unknown Executive: High return capital light growth.
Unknown Executive: <unk> that you called out on the slide can you give some examples of what these investments and the tail and how we should think about.
Unknown Executive: Central pace of these kinds of investments looking beyond 2024.
Speaker Change: Yes, I'll give you a couple of examples this year in particular, we are focusing on.
Unknown Executive: Yeah, I'll
Unknown Executive: Yeah, I'll give you a couple of examples. This year, in particular, we are focusing on Colbert. Colbert saw that they are similar to robots, but they sort of work with humans a lot more flexibly than a regular robot. So when we think about automation, we're looking to deploy numerous instances where we could actually use a cobot, and that could eliminate not only a human operator, but also the cobot can run lights out 24-7. So we're trialing that technology in multiple locations, in multiple plants, in multiple applications. That would be one example.
Unknown Executive: Co bonds right co bots are.
Unknown Executive: They are similar to robots, but they sort of work with human so a lot more flexibly than a regular robot right. So when we think about automation.
Unknown Executive: We're looking to deploy numerous instead.
Unknown Executive: Instances, where we could actually use of cobalt and that could eliminate not only a human operator, but also the cobalt can Ron lights out 20.
Unknown Executive: <unk> right. So we're trialing that technology in multiple locations in multiple plants and multiple applications that would be one example, the second example would be as we look to replace old equipment, we will look to automate use newer technology.
Unknown Executive: The second example would be as we look to replace old equipment, we will look to automate, use newer technology, and continue to look for productivity improvements in terms of labor, but also in terms of capacity utilization. How can we run the machine 24-7 is really how we think about these automation investments. Many times, these are not expensive. A cobot, just the gear itself, is like $70,000. Fully implemented, even if you push it, $120,000. If that $120,000 cobot can eliminate one operator in three shifts, it's a quick payback. So that's what we think about these automation investments and continuing to deploy automation to drive productivity and expand capacity.
Unknown Executive: And continue to look for productivity improvements.
Unknown Executive: In terms of labor, but also in terms of capacity utilization right. How can we how can we run the machine 24, seven is really how we think about these automation investments.
Unknown Executive: Many times these are not expensive a co bought just the gear itself is like 70 grant right.
Unknown Executive: Fully implemented maybe.
Unknown Executive: 102.
Unknown Executive: Even though you push it to 120 K right if that 120 K co bot can eliminate one operator right.
Unknown Executive: In three shifts right. It's a quick payback. So that's how we think about this automation investments.
Unknown Executive: And and are continuing to deploy automation to drive productivity.
Unknown Executive: And expand capacity.
Speaker Change: Alright appreciate the appreciate the examples.
Unknown Executive: All right, I appreciate the examples, Jag, I'll hop back in queue.
Speaker Change: Got back in queue.
Jag: Thanks Blake.
Operator: For any further questions, please press star followed by 1 on your telephone keypad now. Our next question is from Ted Jackson of Northland Securities. Please go ahead.
Speaker Change: Any further questions. Please press star followed by one on your telephone keypad now.
Operator: Our next question is from Ted Jackson of Northland Securities. Please go ahead.
Ted Jackson: Morning, Ted. Congratulations on the quarter.
Ted Jackson: Good morning, Ted.
Ted Jackson: Gratulation so on the quarter.
Unknown Executive: Yes, good morning. My kind of easy questions were all asked or actually answered in your presentation. So let's ask more about something more conceptual.
Ted Jackson: Good morning, Thank you. Thanks.
Ted Jackson: My kind of easy questions. We're all asking Ric we're actually been answered in your presentation. So let's ask more like kind of conceptual things.
Unknown Executive: So let's start with MSA, and you did. Talk a bit about customer cross-pollination, but can you give us an update in terms of the capacity utilization at MSA today? I mean, when you bought the company, it was at 80 percent. You had about 20 percent of that to fill. Where does that stand now? When do you think you'll get that at 100 percent?
Ted Jackson: So let's start with MSA.
Unknown Executive: You did.
Unknown Executive: Talk a bit about the customer cross pollination, but can you give us an update in terms of the capacity utilization at MSA today I mean, when you bought the company. It was at 80% you had about 20% of that fulfill.
Unknown Executive: Where does that stand now when do you think you'll get that at a 100%.
Unknown Executive: Yes.
Unknown Executive: Yeah, when you think of MSA, you know, initially, that utilization rate was around 80%. But we've opened up excess capacity through our MBX over the last, let's call it, you know, three quarters. So I would say today that it's more like 70%.
Unknown Executive: When you think of MSA.
Unknown Executive: Initially that will add that utilization rate was around that 80%, we've opened up excess capacity through our <unk> over the last let's call. It three quarters. So I would say today, that's more like 70% provides us even more opportunity to cross pollinate that facility our pipeline remains very strong.
Unknown Executive: We're very encouraged by the number of opportunities that we're seeing in.
Unknown Executive: Unfortunately takes a little more time in some circumstances when customers.
Unknown Executive: So it provides us with even more opportunity to cross pollinate that facility. You know, our pipeline remains very strong. We're very encouraged by the number of opportunities that we're seeing. And, you know, it unfortunately takes a little more time in some circumstances when customers, you know, model changeovers, and just their timing of launch doesn't always align with where we'd like to see them. But generally speaking, you know, everything there is really shaping up as we expected. And again, you can see by the performance in the quarter, they're all performing even better than our initial expectations. And a lot of that is surrounded by really adapting that MBX culture.
Unknown Executive: Our new model changeovers, and just their timing of launch doesn't always align with what are we likely to see it but generally speaking everything there is really shaping up as we expected and again you can see by the performance in the quarter Theyre all performing than our initial expectation and a lot of that is surrounding by really adapting that <unk>.
Unknown Executive: <unk> culture.
Unknown Executive: Okay.
Unknown Executive: Okay. Then, getting away from MSA and also Hazel Park, the rest of your facilities, can you give us an update in terms of where your utilization rates are in there and where you think you can get them in the next, you know, one year and two years?
Unknown Executive: And then getting away from MSA and also Hazel Park the rest of your facilities.
Speaker Change: Facilities can you give us an update in terms of where utilization rates are in there and where you think you can get them in the next one.
Speaker Change: One year in two years.
Unknown Executive: Yeah, as we discussed Ted, um, hazel pork, will be a $100 million revenue plan for us in 2025. We have the, the demand to fill that plant. And we continue to ramp up our product launches in the plant, and we are optimistic that we'll hit that target by the end of this year going into 2025 to make Hazel Park a $100 million plant for MEC in 2025 and beyond. And after that, you know, how much more can we expand capacity at Hazel Park with MBX and productivity initiatives? We'll focus on that once we get into 2025. But at this point, we're focused on ramping up the plant to hit our targeted revenue for 2025.
Speaker Change: Yes, as we discussed had hazel.
Unknown Executive: <unk> Park.
Unknown Executive: We will be $100 million revenue planned for us in 2025.
Unknown Executive: We have the.
Unknown Executive: The demand to fill that plant and we continue to ramp our in product launches in the plant and we are.
Unknown Executive: Optimistic that we'll hit that target by end of this year going into 2025 to make Hazel Park, a $100 million plant for Mac in 2025 and beyond and after that.
Unknown Executive: How much more can we expand capacity at Hazel Park with Mdx and productivity initiatives will focus on that once we get into 2025, but at this point, we're focused on ramping the plant to hit our targeted revenue for 2025.
Ted Jackson: Okay, I guess, what I was asking for the non Haynesville Park plants are the ones that you have.
Unknown Executive: Well, Jag, actually, I was asking for the non-Hazel Park plants, you know, the ones that, you know, you've been very upfront with regards to Hazel Park itself, although it does beg a question. I think I recall it was, I think it was the last call, you were on track for $100 million, you had $75 of what you expected to run through there, like in the books, and you had 25 more to go.
Unknown Executive: <unk> been very upfront with regard to the Haynesville Park itself, although it does take your questions.
Unknown Executive: I think I recall, maybe it was I think it was the last call that you were on track for $100 million yet 75.
Unknown Executive: So just since we're on Hazel Park, is it fair to assume that you've, you know, kind of circled the rest of that business that you needed to fill that plant in terms of your guidance? And then again, I'm kind of more questioning where there is capacity outside of Hazel Park and MSA and kind of where you see the trend lines for that? Yeah.
Unknown Executive: What you expect it to run through there like in the books and you had 25 more to go so just since we're on Haynesville Park.
Unknown Executive: Is it fair to assume that.
Unknown Executive: Kind of circled on the rest of that business that you needed to fill that plant in terms of your guidance and then again got it more questioning whereas capacity outside of Haynesville Park at MSA and kind of where you see the trend lines for that.
Unknown Executive: Yeah, we continue to fill that $25 million pipeline, if you will. Our pipeline is very strong. Going into 2025, you know, I am confident that we will be able to fill that revenue gap in Hazel Park outside of Hazel Park, Ted.
Speaker Change: Yes, we continue to fill that.
Unknown Executive: $25 million pipeline, if you will our pipeline is very strong.
Unknown Executive: Going into 2025.
Ted Jackson: I am confident that we will be able to fill that revenue gap in his remark I would set of Hazel Mark pad.
Unknown Executive: The demand continues to be strong.
Unknown Executive: The demand continues to be strong. We continue to open capacity, even on first shifts, right? If you recall, we were full on first shifts. We were approximately 79% full on second shift and, you know, third and fourth shifts, right, you know, much lower. So what we've done over the past year is to continue to open up capacity with MBX initiatives. We have done about 150 Kaizen events in the last 12 months. Sorry, last five quarters.
Unknown Executive: We continue to open capacity, even on push ships right. If you recall we were full.
Unknown Executive: Our ships, we were approximately 79% full on second shift and third and fourth ships right.
Unknown Executive: Lower.
Unknown Executive: So what we've done over the past year is to continue to open up capacity with mdx initiatives, we've done about 150.
Unknown Executive: With all of those activities, we continue to expand capacity and productivity, both on first and second shifts. So given that, we continue to go after new business for every single plant. I don't, I don't, I can't think of any plant that we're not able to fill at this point. So given, even in a softer end market, you know, year, we continue to grow. That's a testament to our pipeline. That's a testament to the value we provide to our customers and our ability to continue to grow with not only existing customers but also to bring in new customers to MEC.
Unknown Executive: Kaizen events in the last 12 months.
Unknown Executive: Sorry last five quarters.
Unknown Executive: With all of those activities, we continue to expand capacity and productivity both on <unk> and second shifts so given that we continue to go after new business for every single plant.
Unknown Executive: I don't I can't think off.
Unknown Executive: Any plant that we're not able to fill at this point.
Unknown Executive: So given even in a softer end market.
Unknown Executive: Year, we continue to grow and Thats, a testament to our pipeline is a testament to the value we provide to our customers and our ability to continue to grow with not only.
Unknown Executive: Existing customers, but also continuing to bring in new customers to Mac.
Speaker Change: So I have one more question, but before I ask it and I'm going to summarize what you just said to make sure I listened correctly.
Unknown Executive: So I have one more question, but before I ask it, I'm going to summarize what you just said to make sure I listen to it correctly, is what you're telling me is that, you know, essentially, I would say that maybe utilization rates today are not a good metric because your utilization, your capacity across your network of facilities is increasing as you're making them more efficient, which means that, you know, your fixed cost is staying the same, you're improving margins, but you even have more room for margin improvement as you fill this capacity because you have more capacity with the same fixed cost and you have a better runway in terms of realizing your goals as we think about your longer term forecast. Is that kind of what you're telling me, Jag? I think you
Unknown Executive: What you're telling me is that essentially I would say that maybe utilization rates today are not a good metric because your utilization your.
Unknown Executive: Pasty across your network of facilities is increasing as you're making them more efficient which.
Unknown Executive: Means that your fixed cost is staying the same youre improving margins, but to even have more room for margin improvement as you fill this capacity because you have more capacity with the same fixed cost and you have a better runway in terms of realizing your goals as we think about your longer term forecast that kind of what youre telling me.
Unknown Executive: I think you summarized it better than I could have, Ted. Thank you for that.
Jag: I think you summarized it better than I could have Pat Thank you for that.
Speaker Change: And one more comment on that right.
Unknown Executive: Some of our large plans such as naval.
Unknown Executive: And just one more comment on that, right? Some of our large plans, such as Mayville and Defiance, have had historically impressive volumes, revenues, and EBITDA margins and EBITDA dollars in our history of 79 years, right? So that's a testament to how we're continuing to put additional volumes into our plans, but also we're able to take cost out and make these large, what we call battleships, continue to be more efficient and able to produce more.
Unknown Executive: And the defiance have had historically.
Unknown Executive: Impressive.
Unknown Executive: Volumes revenues and EBITDA margins and EBITDA dollars.
Unknown Executive: In our history up 79 years right. So that's a testament to how we're continuing to put additional volumes into our plans, but also we're able to take cost out and make these large what we call as battleships right continue to be more efficient.
Unknown Executive: And being able to produce more and back to your point, yes. It's the same fixed cost strategy, what can stuff more into some of these large plants ride that drop through is just incredible.
Unknown Executive: And back to your point of, yeah, it's the same fixed cost, right? What can you stuff more into some of these large plants, right? That drop through is just incredible. So that's where the majority of our MBX initiatives are focused on, to continue to expand productivity, and expand capacity in some of our large plants so that we can show our customers, right, that we can take more volume. Even when we're ramping up new capacity at Hazel Park, we continue to fill our existing plants with a lot more volume.
Unknown Executive: So that's where majority of our mdx initiatives are focused on is to continue to expand productivity expand capacity in some of our large plants so that.
Unknown Executive: We can show that our customer side that we can take more volume even when we're ramping up new capacity Hazel Park, we continue to fill our.
Unknown Executive: Existing plants with a lot more volume.
Speaker Change: Great and now my last question, because I'm, taking up too much time I wanted to circle back to the.
Unknown Executive: Great And now, my last question, and I've been taking up too much time, I want to circle back to the M&A strategy and progress. And, you know, I know that in the ideal world, what you really want to do is kind of, you know, pay off MSA, get the delevering in place, and then be able to, you know, go and pick up, you know, whatever it might be, you know, something in plastics, composites, or new customers in the existing businesses. That being said, when you think about M&A, you know, it's not necessarily you get to pick your timing. When your opportunities come, they come, and you've got to have to just sort of dance the dance.
Unknown Executive: M&A strategy and progress.
Speaker Change: I know that.
Unknown Executive: The ideal world, which you really want to do is kind of payoff MSA get the delevering in place and then be able to.
Unknown Executive: Go and pick up whatever it might be something in plastics composites or new customers in the existing businesses.
Unknown Executive: That being said when you think about M&A.
Unknown Executive: Not necessarily you get a pick your timing when your opportunities come they come in you got to have to just sort of dance the dance.
Unknown Executive: Where are you in terms of your funnel is there any.
Unknown Executive: Where are you in terms of your funnel? Is there anything that, you know, you don't have to get into too many specifics, but is there any chance that any of the opportunities that you are in discussions with or evaluating could come into play during this fiscal year? That's my last question. Yeah, great. Yeah, great question, Ted.
Unknown Executive: Seeing that.
Unknown Executive: You have to get into too much specifics, but is there any chance that any of the opportunities that you are in.
Speaker Change: Discussions with are evaluating could come into play during this fiscal year next and Thats My last question.
Unknown Executive: We continue to prioritize debt reduction for 2024. As you've seen, the Greek asylum generation in Q1, we continue to focus on inventory reduction, improving inventory returns, and reducing our working capital. With all of these activities, we're confident that we can reduce our debt and our leverage by the end of this year. We will target the low end of that range, to be honest, to get to by the end of this year with our increased focus on free cash flow generation. Having said that, we have not slowed down on our approaches to, evaluations of potential M&A targets. We have a list of targets that, you know, what we call, you know, must-dos, right?
Unknown Executive: Yes, Great question, Ted we continue to prioritize debt reduction for 2024.
Unknown Executive: As you have seen the peak.
Unknown Executive: Free cash flow generation in Q1.
Unknown Executive: We continue to focus on inventory reduction improving inventory turns reducing our working capital with all of these activities. We are confident that we can reduce our debt and our leverage by end of this year.
Unknown Executive: We will target the low end of that range to be honest to get to before end of this year with our increased focus on free cash flow generation.
Unknown Executive: Having said that we have not slowed down on our.
Unknown Executive: Approaches evaluations of potential M&A targets.
Unknown Executive:
Unknown Executive: We have a list of targets that what we call as a must dos right.
Unknown Executive: We will continue to engage with those targets, and we'll continue to wait for the appropriate time for these transactions to materialize, but with the first priority on debt reduction to get down to one and a half times leverage by the end of this year. As we approach that low end of that range, one and a half to two times what we laid out, we will get more active in terms of what we can do next, you know, with our, you know, M&A. Having said all that, you know, the chance of a transaction closing in 2024 is small.
Unknown Executive: We'll continue to engage with those targets will continue to wait.
Unknown Executive: Wait for the appropriate time for these transactions to materialize, but with a priority on debt reduction to get down to one five times leverage by end of this year.
Unknown Executive: As we approach that.
Unknown Executive: Low end of that range, one five to two times as we laid out.
Unknown Executive: We will get more active in terms of what we can do next with our.
Unknown Executive: M&A capacity.
Unknown Executive: Having said all of that the chance of that transaction closing in 2024 is small.
Unknown Executive: You never say never, but it will be small because we're laser focused on our debt reduction. But we will continue to engage with potential targets. We will continue to look for ways to fill our skills gap and our offerings to our customers. Okay, thanks very much, Jag.
Unknown Executive: You never say never but it will be small because we're laser focused on our debt reduction.
Unknown Executive: But we will continue to engage with potential targets, we will continue to.
Speaker Change: Look for.
Unknown Executive: Ways to fill our skills gap and our.
Unknown Executive: Offerings to our end customers.
Speaker Change: Okay. Thanks, very much guys.
Unknown Executive: And congrats on the quarter. And I was impressed with your free cash flow. I mean, I kind of like free cash flow, you know. Talk to you later.
Unknown Executive: <unk> in the quarter and I was impressed with your free cash flow kind of like free cash flow.
Unknown Executive: Talk to you later. Thank you, Ted. Thanks, Ted
Unknown Executive: Talk to you later.
Jag: Thanks, Ed.
Unknown Executive: The next question is from Tim Hudson. Please go ahead.
Operator: The next question is from Tim Moore of EF Hutton. Please go ahead.
Timothy M. Moore: Good morning, Tim Good morning, Tom.
Timothy M. Moore: Morning, Tim. Morning, Tim. Thanks. Good morning. Good morning.
Timothy M. Moore: Good morning. Good morning, just wanted to reiterate it's always nice to see your free cash flow.
Unknown Executive: I just want to reiterate, you know, it's always nice to see free cash flow. And, you know, it's really what I think stocks are based on in the long term. So great work there. And it's nice to see, you know, an organic sales growth beat and maybe 2 percent power. Power sports is very impressive.
Timothy M. Moore: Really what I think stocks based on on a long term so great work, there and I think you're seeing on organic sales growth for you to maybe 2%.
Unknown Executive: Jag, you know, I was wondering maybe if you could give one or two examples of maybe wins over the last year or so or incremental work from current customers where you're doing more of the value-added steps, and the process is like painting and coating and, you know, tackling some more of the complex assemblies, which are higher margin. And to remind me, you know, I think from maybe a year ago when we met up for lunch, I might have written this down wrong. You know, I thought maybe 75% of your evaluated steps and processes were being done only in two of your plans. Is that still the case?
Unknown Executive: Our sports was very impressive.
Unknown Executive: Jack I was wondering maybe if you can give one or two examples of maybe wins over the last year or so or incremental work from current customers, where youre doing more of the value added steps in the process is like painting and coating and tackling some more of the complex assemblies, which are higher margin than to remind me of.
Unknown Executive: I think for maybe a year ago, when we met up for months.
Speaker Change: Sam Robert.
Unknown Executive: I thought maybe like 75% of your value added steps processes were being done at only two of your plants is that still the case and kind of what's the plan for that.
Unknown Executive: Yeah.
Unknown Executive: And kind of what's the plan for that? Thanks for the question, Tim. We continue to look for opportunities where we can do more complex fabrications for our customers. We continue to look for where we can do more, whether it is finishings, subassemblies, you know, logistics, and aftermarket. So all of those activities, right, are things that are, you know, at the forefront of our commercial processes and approaches. So I would say that every single opportunity that we look for, and, more importantly, one, in our prepared remarks, we talked about quite a number of wins in the quarter, right?
Jag: Thanks for the question, Tim we continue to look for opportunities, where we can do more complex.
Unknown Executive: Fabrications for our customers, we continue to look for where we can do more whether it is finishings sub assemblies.
Unknown Executive:
Unknown Executive: Logistics aftermarket.
Unknown Executive: So all of those activities right is something that the forefront of our commercial processes and approaches. So I would say that every single opportunity that we look for and more importantly, one in our prepared remarks, we talked about it quite a number of wins in the quarter right I would.
Unknown Executive: I would say pretty much all of them have multiple offerings, you know, not just metal fabrication but also finishing and subassemblies, etc., right? So every opportunity we look for, we'll continue to add a lot of value, and that's how we can show our customers that we're the preferred supplier to our end market.
Unknown Executive: Pretty much.
Unknown Executive: All of them have multiple offerings.
Unknown Executive: Not just.
Unknown Executive:
Unknown Executive: Metal fabrication, but also.
Unknown Executive: Finishing and sub assemblies etcetera right. So.
Unknown Executive: Every opportunity we look for we'll continue to have a lot of value addition, and that so we can show to our customers that where the.
Unknown Executive: Referred a supplier.
Unknown Executive: Two our end markets.
Unknown Executive: That's helpful. Um, maybe just switching gears to, you know, Kaizen, which has never stopped. Continuous improvement definition, but it seems like you, you know, have you uncovered a noticeable amount of extra capacity or maybe worker shifts? Optimization is, you know, you made your kind of tour to all the plants the past year and got to imagine some of those supervisors and managers when you met, you know, a year ago. I'm just kind of wondering if you could talk about that for maybe incremental margins and unlocking capacity.
Speaker Change: That's helpful.
Unknown Executive: Just switching gear to <unk>.
Unknown Executive: Zones, which never sockets.
Unknown Executive: Continuous improvement definition, but it.
Unknown Executive: It sounds like you have.
Unknown Executive: Have you recovered.
Unknown Executive: Noticeable amount of extra capacity or maybe worker shifts optimization is.
Unknown Executive: Major kind of towards all the plants, the past year and I imagine some of those supervisors and managers when you met a year ago.
Unknown Executive: Thinking they were at full capacity, but they werent just kind of wondering if you can talk about that for maybe incremental margins and unlocking capacity.
Unknown Executive: Yeah, as I just talked about Defiance and Mayville as an example, right? We continue to find great opportunities to reduce our labor content, increase our capacity, and continue to grow in every single place. So, a lot of that comes from our focused efforts in operations to standardize, to take cost out, and, you know, have really good discipline, whether it's, you know, lean daily management, whether it's the supervisors and the operations managers and the plant managers running Kaizans.
Unknown Executive: Yes.
Unknown Executive: <unk> talked about defiance and May well as an example, right. We continue to find great opportunities to reduce our labor content increase our capacity and continue to grow in every single plant. So a lot of that comes from our focused efforts.
Unknown Executive: In operations to standardize.
Unknown Executive: To take cost out and have really good discipline, whether its lean daily management, whether it is.
Unknown Executive: The supervisors and the operate ops managers from the plant managers running <unk>.
Unknown Executive: Me and my leadership team spent two weeks ago, a full week on the plant floor, and I was in jeans and steel-toed shoes and safety glasses all week, you know, working on a plant Kaizan where, you know, we moved machines around, we laid out the workflow, we did time studies, and in the end, right? Before Kaizan, each shift needed three operators, post-Kaizan, right? We were able to consolidate all the steps, and we were able to eliminate one operator, and we can still run the cell more efficiently, with more throughput than pre-Kaizan with only two operators, right?
Unknown Executive: Me and my leadership team, we spent two weeks ago.
Unknown Executive: A full week on the plant floor and I was in jeans, and steel toe shoes and safety glasses all week.
Unknown Executive: Working on a plan, where we moved our machines around we really laid out the workflow we added time studies.
Unknown Executive: And in the end right.
Unknown Executive: Each shift needed.
Unknown Executive: Pre kaizen each shift needed three operators post guys Ann right, we were able to consolidate.
Unknown Executive: All the steps and we were able to eliminate one operator, and we can still run the sell more efficiently.
Unknown Executive: More throughput than pre <unk> with only two operators right I mean that.
Unknown Executive: I mean, that is sort of the focus that we have in every plant and, you know, every cell, so we're driving that level of discipline. So, we did six Kaizans during that week in Wisconsin, and, you know, I won't give you the numbers, but a significant amount of savings that we were able to unlock, right? But at the same time... You know, the key is not what we did during that week, Tim, as you know.
Unknown Executive: It is sort of the focus that we have in every plant and every cell. So we're driving that level of discipline.
Unknown Executive: We did six zones.
Unknown Executive: During that week in Wisconsin.
Unknown Executive: And.
Unknown Executive: I won't give you the numbers, but a significant amount of savings that we were able to unlock right, but at the same time.
Unknown Executive: The key is not what we did during that week payments.
Unknown Executive: The key is to sustain those savings for the rest of the year and then beyond. So we have put in pretty disciplined processes where we're able to monitor those savings on a monthly basis. And if they, you know, continue to remain strong, we'll continue to monitor them. If they fall back, right, then we have countermeasures to get those savings back online, right?
Unknown Executive: The key is to sustain those savings for rest of the year and then beyond so we have also put in pretty disciplined processes, where we're able to monitor those savings on a monthly basis and if they continue.
Unknown Executive: Continue to remain strong.
Unknown Executive: Senior to monitor if they fall back right then we have countermeasures.
Unknown Executive: To get those savings back up back online right. So it's a very focused effort across the company and I'm really proud of RMB X team I'm really proud of the entire Mac team.
Unknown Executive: So it's a very focused effort across the company. And I'm really proud of our MBX team. I'm really proud of the entire Mac team who is, you know, energized by our MBX program, but more importantly, driving day to day, not just when me and the leadership team are on the plane floor, right, but day to day driving improvements.
Unknown Executive: Who is energized by RMB X program, but more importantly, right driving day to day not just when me and the leadership team are on the plant floor right, but day to day driving improvements and Thats reading out in our results.
Speaker Change: Great that's really helpful I'm going to say.
Unknown Executive: Great, Jag, that's really helpful. I'm going to save my final three questions for offline when we talk in an hour, but thank you. Thank you.
Speaker Change: Our final three questions were offline when we talk to an hour, but thank you.
Speaker Change: Thank you thanks, Tim.
Speaker Change: We have no further questions I'd like to hand, it back to Jack <unk> for closing remarks.
Jagadeesh A. Reddy: We have no further questions. I'd like to hand it back to Jagadeesh for closing remarks.
Jagadeesh: Once again, thank you for joining our call. We appreciate your continued support of Mac and we look forward to updating you on our progress next quarter should you have any questions. Please contact Noel Ryan our Stefan Neely at Vallum, Our Investor Relations Council. This concludes our call today.
Jagadeesh A. Reddy: Once again, thank you for joining our call. We appreciate your continued support of MEC, and we look forward to updating you on our progress next quarter. Should you have any questions, please contact Noel Ryan or Stephan Neely at Valum, our Investor Relations Counsel. This concludes our call today. You may now disconnect.
Jagadeesh A. Reddy: You may now disconnect.