Q2 2024 Mayville Engineering Co Inc Earnings Call
Good morning. Thank you for attending today's Mayville Engineering Company second quarter 2024 earnings conference call. My name is Tamiya and I will be your moderator for today's call.
Operator: 2nd Quarter 2024 Earnings Conference Call. My name is Tamiya, and I will be your moderator for today's call.
All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to your host, Stefan Neely, with Valum Advisors. You may proceed.
Operator: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to your host, Stephan Neely, with Valum Advisors. You may proceed.
Stephan Neely: Thank you, Operator. On behalf of our entire team, I'd like to welcome you to the Mayville Engineering Second Quarter 2024 Results Conference Call. Leading the call today is MEC'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 with the Securities and Exchange Commission. We undertake no obligation to update our forward-looking statements.
Stefan Neely: Thank you, Operator. On behalf of our entire team, I'd like to welcome you to the Mayville Engineering Second Quarter 2024 Results Conference Call.
Speaker Change: Leading the call today is MEC's President and CEO , Jag Reddy, and Todd Butz, Chief Financial Officer.
Speaker Change: 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.
Speaker Change: Including the risks described in our periodic reports with the Securities and Exchange Commission.
Speaker Change: Except as required by law, we undertake no obligation to update our forward-looking statements.
Stephan Neely: Furthermore, this call will include the discussion of certain non-GAAP financial measures. Reconciliations of these measures to the closest GAAP financial measure are included in our quarterly earnings press release, which is available at mechinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Chad.
Speaker Change: Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.
Chad: Thank you, Stephan, and good morning, everyone. Thank you for joining us today. During the second quarter, we continued to demonstrate strong strategic execution, which drove robust net sales growth, margin expansion, and free cash flow conversion. During the quarter, our team successfully executed on new project startup in our commercial vehicle and power sports markets. These new projects drove nearly 7% year-over-year organic sales growth, well above the growth trends in our end market. Our teams continue to focus on implementing our MBX Lean initiatives, driving 0.9 million of year-over-year self-help adjusted EBITDA improvement during the second quarter.
Jack: Thank you, Stephan, and good morning, everyone. Thank you for joining us today. During the second quarter, we continue to demonstrate strong strategic execution, which drove robust net sales growth, margin expansion, and free cash flow conversion.
Jack: During the quarter, our team successfully executed on new project startups in our commercial vehicle and power sports and markets.
Jack: These new projects drove nearly 7% year-over-year organic sales growth, well above the growth trends in our end markets.
Jack: Our team's continued focus on implementing our MBX Lean initiatives drove $0.9 million of year-over-year self-help adjusted EBITDA improvement during the second quarter.
Jag Reddy: Since the beginning of the year, our structured approach to operational excellence and lean manufacturing has resulted in approximately $2.5 million of sustainable year-over-year margin improvement. As we move into the second half of the year, our team's continued successful execution on key commercial growth and operational excellence initiatives, combined with improving utilization at our Hazel Park facility, will be important catalysts for outperforming our end market. While customer demand remains steady throughout the first half of the year, our customers' outlook for the second half of the year has softened in a few of our key end markets.
Jack: Since the beginning of the year, our structured approach to operational excellence and lean manufacturing has resulted in approximately $2.5 million of sustainable year-over-year margin improvement.
Jack: As we move into the second half of the year,
Jack: Our team's continued successful execution on key commercial growth and operational excellence initiatives combined with improving utilization at our Hazel Park facility will be important catalysts for outperforming our end markets.
Jack: While customer demand remains steady throughout the first half of the year, our customers' outlook for the second half of the year has softened in a few of our key end markets.
Jag Reddy: However, with our robust strategic execution combined with our market share gains, we continue to expect that we will deliver growth in 2024. With that in mind, we are reiterating our 2024 financial guidance for net sales and adjusted EBITDA, which projects full-year net sales growth of between 5% and 9% and growth in adjusted EBITDA of between 9% and 15%. As it relates to free cash flow, our strong performance in the first half of the year has outpaced our expectations. As a result, we are increasing our expected full year 2024 total free cash flow guidance to between $45 and $55 million.
Jack: However, with our robust strategic execution combined with our market share gains, we continue to expect that we will deliver growth for 2024.
Jack: With that in mind, we are reiterating our 2024 Financial Guidance
Jack: for net sales and adjusted EBITDA, which projects full year net sales growth of between 5% and 9% and growth in adjusted EBITDA of between 9% and 15%.
Jack: As it relates to free cash flow, our strong performance in the first half of the year has outpaced our expectations.
Jack: As a result, we are increasing our expected full year 2024 total free cash flow guidance to between $45 million and $55 million.
Jag Reddy: Turning now to a review of market conditions across our primary and secondary markets. Let's begin with our commercial vehicle market, which represents approximately 37% of our trailing 12-month revenue. During the second quarter, commercial vehicle revenue increased by 10.8% on a year-over-year basis. This was primarily due to strong strategic execution on new project launches and strategic pricing initiatives, which more than offset a 0.3% decrease in North American Class VIII production during the quarter.
Jack: Turning now to a review of market conditions across our primary and market.
Jack: Let's begin with our commercial vehicle market, which represents approximately 37% of our trailing 12-month revenues.
Jack: During the second quarter, commercial vehicle revenue increased by 10.8% on a year-over-year basis.
Jack: This is primarily due to strong strategic execution on new project launches and strategic pricing initiatives, which more than offset a 0.3% decrease in North American Class VIII production during the quarter.
Jag Reddy: Currently, ACT Research forecasts Class VIII vehicle production to decrease 9.4% year-over-year in 2024 to approximately 308,000 units. ACT expects build rates to soften materially in the second half of the year, declining 17% in Q3 and 23% in the fourth quarter.
ACT Research: Currently, ACT Research forecasts that Class VIII vehicle production to decrease 9.4% year-over-year in 2024 to approximately 308,000 units.
ACT Research: ACT expects build rates to soften materially in the second half of the year, declining 17% in Q3 and 23% in the fourth quarter.
Jag Reddy: For MEC, we expect our new CV project launches to continue ramping into the second half of the 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 VIII production to recover in 2025, growing 1% compared to 2024 and having continued growth of 11% from 2025 to 2026, which supports our organic growth expectations for the next two years. Next is the construction and access market, which represented approximately 17% of our trailing 12-month revenues. Construction and access revenue increased 2.7% on a year-over-year basis in the second quarter.
Speaker Change: For MECH, we expect our new CV project launches to continue ramping into the second half of the year, which will help us maintain comparable sales to this end market relative to 2023.
Jag Reddy: 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 due to infrastructure-related equipment demand and ongoing new customer wins. The power sports market represented approximately 18% of our trailing 12-month revenues and increased by 26.3% on a year-over-year basis in the second quarter. We continue to benefit from market share gains, which include new customer programs on high-end models, and we're modestly offset by softening consumer discretionary demand.
Jag Reddy: As we have stated in the past, we believe that our growth rate in this end market will slow relative to the prior year comparison, but the momentum from our market share gains in this end market will continue to drive growth for the year. Our agricultural market represented approximately 9% of trailing 12-month revenues and increased 8.9% on a year-over-year basis during the second quarter. Our second quarter results for this end market reflect contributions from the MSA acquisition offset by softening demand within our legacy large ag market. The outlook for agriculture has been increasingly uncertain due to the impact of lower crop prices and elevated inventory levels.
Speaker Change: As we have stated in the past, we believe that our growth rate in this end market will slow relative to the prior year comparisons, but the momentum from our market share gains in this end market will continue to drive growth for the year.
Jag Reddy: Given this uncertainty, we expect our markets to be soft in the second half of the year but still outperform the overall ag market due to market share gains with key customers. Overall, our second quarter net sales growth included nearly 11% growth associated with the Mid-States Aluminum Acquisition, which closed early in the third quarter of last year. The majority of MSA revenues are represented in our other end market.
Speaker Change: Overall, our second quarter net sales growth included nearly 11% growth associated with the Mid-States Aluminum Acquisition, which closed early in the third quarter of last year.
Jag Reddy: For 2024 as a whole, we continue to see MSA generating between 20 to 30 million in incremental net sales. On the commercial front, we continue to build our momentum, cross-selling its capabilities to our existing customers. We expect that these efforts will be significant catalysts for above-market growth in 2025. On the pricing front, our team's efforts continue to bear fruit, particularly as new project volumes ramp up. During the second quarter, our commercial pricing initiatives drove $0.6 million in incremental adjusted EBITDA year-over-year net of inflationary pressures.
Speaker Change: On the commercial front, we continue to build our momentum cross-selling MSA's capabilities to our existing customers. We expect that these efforts will be significant catalysts for above market growth in 2025.
Speaker Change: On the pricing front, our team's efforts continue to bear fruit, particularly as new project volumes ramp up.
Speaker Change: During the second quarter, our commercial pricing initiatives drove $0.6 million in incremental adjusted EBITDA year-over-year, net of inflationary pressures.
Jag Reddy: We continue to target between $1 million and $2 million of adjusted EBITDA growth from our pricing initiatives through the end of the year. Turning now to an overview of substantial new business wins during the second quarter. We have continued to gain additional market share with our commercial vehicle customers as they plan their vehicle updates going into the emissions regulation changes. We expect to continue to grow market share for the next two years with the amount of change that is expected to occur.
Speaker Change: We continue to target between $1 million and $2 million of adjusted EBITDA growth from our pricing initiatives through the end of the year.
Speaker Change: Turning now to an overview of substantial new business wins during the second quarter.
Jag Reddy: During the second quarter, we continued to expand share with one of our new Powersports customers, supporting their next generation product lines. These wins support additional growth over the next year, and we expect additional organic opportunities in the quarters ahead. In the quarter, we expanded share within our primary military customer, expanding share on current products, bringing us additional diversification across platforms. Additionally, during the quarter, we received multiple awards for engine two products in the agriculture market driven by model updates based upon regulatory emissions changes that will be occurring in the years ahead.
Speaker Change: During the second quarter, we continue to expand share with one of our new PowerSports customers supporting their next generation product lines.
Speaker Change: These wins support additional growth over the next year and expect additional organic opportunities in the quarters ahead.
Speaker Change: In the quarter, we expanded share within our primary military customer, expanding share on current product, bringing us additional diversification across platforms.
Speaker Change: During the quarter, we received multiple awards for Engine 2 products in the agriculture market, driven by model updates based upon regulatory emissions changes that will be occurring in the years ahead.
Jag Reddy: We also grew share with one of our industrial customers supporting material handling equipment in the quarter as they look to launch new products into the market. As part of our ongoing strategic success, our operations team has continued to build momentum with the execution of our MBX framework and the culture of continuous improvement that has begun to permeate the company. These initiatives have been driven by our rigorous approach to MBX Lean implementation, highlighted by over 200 MBX Kaizen events since launching the MBX program in late 2022.
Speaker Change: We also grew share with one of our industrial customers supporting material handling equipment in the quarter as they look to launch new products into the market.
Speaker Change: As part of our ongoing strategic success, our operations team has continued to build momentum with the execution of our MBX framework and the culture of continuous improvement that has begun to permeate the company.
Jag Reddy: In summary, the execution of our commercial and operational excellence initiatives has been quite successful, as represented by our financial performance thus far in 2024. These results give us further confidence in our ability to drive rateable improvements to our financial profile and deliver sustainable long-term shareholder value. As you will recall, we expect to deliver between $750 and $850 million in revenues, expand the adjusted EBITDA margin to between 14% and 16%, and generate free cash flow of between $65 and $75 million by the end of 2026.
Speaker Change: In summary, the execution of our commercial and operational excellence initiatives has been quite successful as represented by our financial performance thus far in 2024.
Speaker Change: As you will recall, we expect to deliver between $750 and $850 million in revenues.
Jag Reddy: Given our strong strategic execution, it is evident that we are making meaningful progress toward achieving these goals. In terms of capital allocation, our strong pre-cash flow generation has allowed us to reduce our net leverage by nearly one turn over the course of the last year. At the end of the quarter, our net leverage ratio stood at slightly below 1.7 times.
Speaker Change: Given our strong strategic execution, it is evident that we are making meaningful progress toward achieving these goals.
Speaker Change: In terms of capital allocation, our strong pre-cash flow generation has allowed us to reduce our net leverage by nearly one turn over the course of the last year. At the end of the quarter, our net leverage ratio stood at slightly below 1.7 times.
Jag Reddy: Given the strong year-to-date cash flow generation, we now expect to be at the lower end of our targeted net leverage ratio range of between 1.5 times and 2 times by the end of 2024. Additionally, during the second quarter, we repurchased $1 million worth of common equity under our $25 million shared repurchase program, with $24 million remaining under the existing authorization. Going forward into the second half of the year, we intend to repay additional debt in order to further reduce our cost of capital.
Speaker Change: Given the strong year-to-date cash flow generation, we now expect to be at the lower end of our targeted net leverage ratio range.
Speaker Change: of between 1.5 times and 2 times by the end of 2024.
Speaker Change: Additionally, during the second quarter, we repurchased $1 million worth of common equity under our $25 million shared repurchase program, with $24 million remaining under the existing authorization.
Speaker Change: Going forward into the second half of the year, we intend to repay additional debt in order to further reduce our cost of capital.
Jag Reddy: Additionally, we're also actively evaluating a more structured approach to our shared repurchase strategy, which aligns with our existing authorization. Strategic M&A has always been a key part of our multi-year growth and business transformation strategy. Our top priorities include lightweight materials fabrication and complementary bolt-on acquisitions of creative assets. As we have been making solid progress towards our leverage goal, we are increasing our focus on evaluating key opportunities to build on our market-leading capabilities and further position the company to capitalize on multi-year secular growth trends in energy transition and OEM outsourcing. Ultimately, we are taking a philosophical approach to capital allocation that is centered on deploying capital in a manner that creates the greatest return for the company and for our shareholders.
Speaker Change: We are increasing our focus on evaluating.
Speaker Change: Key opportunities to build on.
Speaker Change: Our market leading capabilities and further position the company to capitalize on multi-year secular growth trends in energy transition and OEM outsourcing.
Speaker Change: Ultimately, we are taking a philosophical approach to capital allocation that is centered on deploying capital in a manner that creates the greatest return for the company and for our shareholders.
Jag Reddy: We believe the highest opportunities for return are through debt reduction, and we will continue to allocate our capital prudently based on these opportunities. In summary, I am very proud of our team's ongoing commitment to excellence and strategic execution. Their hard work and commitment have positioned us to navigate the impending softening of end-market demand and to deliver above-market growth with sustainable value creation, both in the near term and over the coming years. With that, I will now turn the call over to Todd to review our financial results.
Speaker Change: We believe the highest opportunities for return are through debt reduction, strategic M&A, and share repurchases, and we'll continue to allocate our capital prudently based on these opportunities.
Speaker Change: In summary, I am very proud of our team's ongoing commitment to excellence and strategic execution.
Speaker Change: Their hard work and commitment have positioned us to navigate the impending softening of end-market demand and deliver above-market growth with sustainable value creation.
Speaker Change: Both in the near term and over the coming years. With that, I will now turn the call over to Todd to review our financial results.
Jag Reddy: Thank you, Jay. 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 17.7% on a year-over-year basis to $163.6 million.
Todd Butz: Thank you, Jay. 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.
Todd Butz: Total sales for the second quarter increased 17.7% on a year-over-year basis to $163.6 million.
Todd Butz: This increase was driven by a combination of the MSA acquisition, strong strategic execution, and continued organic sales growth. Partly offset by ongoing softness in our legacy agriculture end market and the expected roll-off of certain military aftermarket programs at the end of 2023. When excluding the MSA acquisition, organic net sales growth was 6.9% on a year-over-year basis. Our manufactured margin was $22.3 million in the second quarter, as compared to $15.1 million in the same prior-year period.
Todd Butz: Our manufactured margin was $22.3 million in the second quarter, as compared to $16.1 million in the same prior year period.
Todd Butz: The increase was primarily driven by organic volume growth, execution of our MBX lean manufacturing, Commercial Pricing, and the Acquisition of MSA. Our manufacturing margin rate was 13.6% for the second quarter of 2024, as compared to 11.6% for the prior year period, for an increase of 200 basis points. Other selling, general, and administrative expenses were $8.3 million for the second quarter of 2024, as compared to $7.4 million for the same prior year
Speaker Change: The increase was primarily driven by organic volume growth, execution of our MDS lean manufacturing initiatives.
Speaker Change: Commercial Pricing and the Acquisition of MSA.
Speaker Change: Our manufacturing margin rate was 13.6% for the second quarter of 2024, as compared to 11.6% for the prior year period, for an increase of 200 basis points.
Speaker Change: Other selling, general, and administrative expenses were $8.3 million for the second quarter of 2024, as compared to $7.4 million for the same prior year period.
Todd Butz: The increase was primarily driven by an additional $500,000 in legal expenses relating to our former fitness, Incremental expense associated with MSA, and increased costs related to compliance required. Interest expense was $3 million for the second quarter of 2024, as compared to $2 million in the prior year period due to higher borrowings under our credit facility.
Speaker Change: The increase was primarily driven by an additional $500,000 of legal expenses relating to our former fitness customer, incremental expense associated with MSA, and increased costs related to compliance requirements. Thank you. Thank you.
Speaker Change: Interest expense was $3 million for the second quarter of 2024, as compared to $2 million in the prior year period due to higher borrowings under our credit facility. The increase in borrowings is due to the acquisition of MSA, which closed on July 1, 2023.
Todd Butz: The increase in borrowings is due to the acquisition of MSA, which closed on July 1, 2020. Our focus on reducing our debt leverage, combined with strong free cash flow through the second quarter of 2024, has allowed us to achieve our net leverage goal of between one and a half and two times, which is ahead of our year-end target. Going into the second half of the year, we will continue to repay debt in order to reduce our interest expense, which is variable based on net leverage.
Speaker Change: Our focus on reducing our debt leverage, combined with strong free cash flow through the second quarter of 2024, has allowed us to achieve our net leverage goal of between one and a half and two times, which is ahead of our year-end target.
Speaker Change: Going into the second half of the year, we will continue to repay debt in order to reduce our interest expense, which is bearable based on net leverage.
Todd Butz: It's just an EBITDA increase to $19.6 million versus $15.3 million for the same prior year period. And just even a margin increase by 100 basis points to 12% in the current quarter as compared to 11% for the same prior year period. The increase in our adjusted evenum margin was primarily due to the increased organic volume, the MSAA acquisition, the MDF initiative, and the benefit from our commercial pricing activity.
Speaker Change: Adjusted EBITDA increase to $19.6 million versus $15.3 million for the same prior year period.
Speaker Change: Adjusted even a margin increase by 100 basis points to 12% in the current quarter, as compared to 11% for the same prior year period.
Todd Butz: Our second quarter results demonstrate the continued progress towards our 2026 Adjusted Evenum Margin goal of 14 to 16 percent. Starting now, to our statement of cash flows and balance. Free cash flow during the second quarter of 2024 was a positive $19.2 million, or $0.94 per share, as compared to a negative $3.7 million in the prior year period.
Speaker Change: Our second quarter results demonstrate the continued progress towards our 2026 Adjusted Evenum Margin goal of 14 to 16 percent.
Speaker Change: Starting now to our statement of cash flows and balance sheet.
Speaker Change: Free cash flow during the second quarter of 2024 was a positive $19.2 million, or $0.94 per share, as compared to a negative $3.7 million in the prior year period.
Todd Butz: The improvement in free cash flow year-over-year was due to improved working capital efficiency resulting from our MDX initiative and a one-time $17.6 million payment of deferred compensation expense in the second quarter of last year. Our strategic execution has been the primary driver of our improved free cash flow conversion thus far in 2024. As a result of our MDF Women's Initiatives, our day sales outstanding and inventory days have both declined by more than 15% as compared to a year ago.
Speaker Change: Our strategic execution has been the primary driver of our improved free cash flow conversion thus far in 2024.
Speaker Change: As a result of our MDF Women Initiatives, our day sales outstanding and inventory days have both declined by more than 15% as compared to a year ago.
Todd Butz: As of the end of the second quarter of 2024, our net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents, was $125.1 million, as compared to $89.7 million at the end of the second quarter of 2023.
Speaker Change: As of the end of the second quarter of 2024, our net debt, which includes bank debt, financing agreements, finance lease obligations,
Speaker Change: And cash and cash equivalents was $125.1 million, as compared to $89.7 million at the end of the second quarter of 2023.
Todd Butz: Our debt reduction resulted in a net leverage ratio of slightly below 1.7 times as of June 30th and will provide for a 30 basis point rate reduction in the third quarter. In light of our second quarter results and our current outlook for the remainder of the year, we are reiterating our financial guidance for net sales and adjusted EBITDA, while increasing our financial guidance for free cash. For 2024, we continue to expect the following net sales of between $620 million and $640 million and adjusted EBITDA of between $72 million and $76 million.
Speaker Change: Our debt reduction resulted in a net leverage ratio of slightly below 1.7 times as of June 30th and will provide for a 30 basis point rate reduction in the third quarter.
Speaker Change: In light of our second quarter results and our current outlook for the remainder of the year, we are reiterating our financial guidance for net sales and adjust EBITDA, while increasing our financial guidance for free cash flows.
Speaker Change: For 2024, we continue to expect the following, net sales of between $620 million and $640 million, and adjusted EBITDA of between $72 million and $76 million.
Todd Butz: For free cash flow, we now expect four-year free cash flow to be in a range between $45 million and $55 million, as compared to our original expectations of between $35 million and $45 million. Our outlook for the whole year continues to reflect a risk-adjusted view of overall demand for the second half of the year. During the first half of the year, we experienced strong growth and margin realization through our strategic execution. However, as Jag mentioned, we have seen softening demand in some of our end markets, particularly commercial vehicles, color sports, and agriculture.
Speaker Change: For free cash flow, we now expect four-year free cash flow will be in a range between $45 million to $55 million, as compared to our original expectations of between $35 million and $45 million.
Speaker Change: Our outlook for the whole year continues to reflect a risk-adjusted view of overall demand for the second half of the year.
Speaker Change: During the first half of the year, we have experienced strong growth and margin realization through our strategic execution. However, as Jag mentioned, we have seen softening demand in some of our end markets, particularly commercial vehicles, color sports, and agriculture.
Speaker Change: These end-market dynamics are in line with the risk-adjusted view of the year, even as our growth and execution during the first two quarters outpaced our expectations.
Speaker Change: Overall, when combined with evolving end market dynamics, our guidance continues to reflect organic net sales growth as compared to 2023 of between one and a half and two and a half percent due to new product wins.
Operator: These end-market dynamics are in line with the risk-adjusted view of the year, even as our growth and execution during the first two quarters outpaced our expectations. Overall, when combined with evolving end market dynamics, our guidance continues to reflect organic net sales growth as compared to 2023 of between one and a half and two and a half percent due to new product wins. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If, for any reason at all, you would like to remove that question, please press star followed by two.
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: Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. The first comes from Meg Dobre-Rebaird.
Speaker Change: If you would like to ask a question, please press star followed by 1 on your telephone keypad.
Speaker Change: If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. The first comes from Meg Dobre-Ribert. You may proceed. Thank you. Thank you.
Meg Dobre-Rebaird: You may proceed. Thank you. Good morning, everyone.
Nick Dobre-Ribert: Thank you. Good morning, everyone, and congratulations to the team on really good performance in a choppy environment. So that's great to see. I guess my first question is on the free cash flow guidance. And Todd, maybe...
Jag Reddy: And congratulations to the team on a really good performance and a champion bond. That's, that's great to see. I guess my first question is on the free cash flow guidance, and Todd, maybe you can help me better understand what prompted you to raise that guidance. Even though the other elements have stayed unchanged, is this just a function of kind of converting some of that inventory into cash? Are there any other working capital options?
Todd Butz: Maybe you can help me better understand what prompted you to raise that guidance, even though the other elements have stayed unchanged. Is this just a function of kind of converting some of that inventory into cash? Are there any other working capital items we need to be aware of?
Todd Butz: Good morning, Meg. I'm going to quickly pass on to Todd here, but I just want to reiterate that our sustained efforts in continuing to drive MBX across our enterprise, that's in both operations and the rest of the functions, and driving better days in payables, better days in receivables, inventory reduction, better forecasting, SIOP implementation, all of these actions that we've been pursuing for the last year and a half, has shown in the first half what the power of MBX is, and that is really what gives us the confidence to raise our guidance for the year.
Speaker Change: Good morning, Meg. I'm going to quickly pass on to Todd here, but I just want to reiterate that our
Todd Butz: Sustained efforts.
Speaker Change: in continuing to drive MBX across our enterprise.
Todd Butz: That's in both operations and the rest of the functions.
Todd Butz: and driving better days in payables, better days in receivables.
Todd Butz: Inventory Reduction.
Todd Butz: Better Forecasting, PsyOp Implementation.
Todd Butz: All of these actions that we've been, you know, pursuing for the last year and a half has shown in the first half, right, you know, what the power...
Todd Butz: Power of MBX is...
Todd Butz: And that is really what gives us the confidence to raise our guidance for the year.
Todd Butz: Yeah, good morning, Joel. To Jake's point, it really is driven by the MBX initiatives. I mean, if you look back, 12-18 months ago, we were at, you know, six times, or terms, rather. Today, we're at just over nine as we finish the second quarter.
Todd Butz: Yeah, good morning, Joel. To Jake's point, it really is driven by the MBX initiatives. I mean, if you look back,
Unknown Speaker: You know, 12, 18 months ago, we were at, you know, six times, or terms rather, today we're at just over nine as we finish second quarter.
Unknown Speaker: In addition to that, you know, we've been working very hard on, you know, our terms and conditions with customers, you know, our collection efforts. I mean, across the board, it's been very, very positive. So, when we looked into the back half of the year, which, historically, the Q4, our fourth quarter is one of our strongest cash flow quarters,
Todd Butz: In addition to that, you know, we've been working very hard on our terms and conditions with customers, you know, our collection efforts. I mean, across the board, it's been very, very positive. So when we looked into the back half of the year, which historically, the Q4, our fourth quarter is one of our strongest cash flow quarters. We do expect that again now, being that range of 45 to 55 million, and that's why we feel confident that we can achieve that. And therefore, we raise the value. But again, looking back historically here, I think in 2021, you had a big cash drag from an inventory build. I'm kind of searching through my memory here.
Unknown Speaker: We do expect now that, again, being that range of 45 to 55 million, and that's why we feel confident that we can achieve that, and therefore we raise the guidance.
Todd Butz: I think that might have had something to do with the challenging supply chain and all the disruptions that existed in the industry at the time. I guess my real question here is, you know, is there room to improve on the performance that you're delivering this year? Should we expect another? You name it, five, a million dollars worth of potential release of working capital as we, So when you think of 2021, it was the supply chain. We're also building inventory for the expected launch of our former fitness customers. So it is a bit of a unique situation there.
Unknown Speaker: Challenging supply chain and all the disruptions that existed in the industry at the time.
Speaker Change: I guess my real question here is, you know, is there room to improve on the performance that you're delivering this year? Should we expect another?
Speaker Change: You name it, $5 million worth of potential release of working capital as we can go forward.
Speaker Change: So when you think of 2021 at the end, it was supply chain. We're also building inventory for the expected launch of our former fitness customers. So a bit of a unique situation there. As we move forward,
Todd Butz: As we move forward, definitely this year, we do expect to unlock continued working capital, whether it be through receivables, payables, our payments, as well as inventory. But I will note that that rate of progression will moderate a bit when you think of, you know, going from six times or six terms rather than nine. You know, there's a lot of, let's say, low-hanging fruit that we get after going from nine to 10 or 10 to 11. It's a little more difficult.
Speaker Change: Definitely this year, we do expect to unlock continued working capital, whether it be through receivables.
Speaker Change: you know payables you know our payments as well as inventory. But I will note that that rate of progression will moderate a bit when you think of you know going from six times or six turns rather than nine you know there's alot of
Speaker Change: let's say, low-hanging fruit that we get after.
Stefan Neely: Unknown Executive, Stefan Neely
Todd Butz: Now, we still remain confident we can achieve that, but it'll take a little more time to do it. But in the near term, we do expect in the next six months that we'll continue to see good working capital progression and favorable free cash flow. Okay, okay. Two questions on NMARC, and I guess the first one is on commercial vehicles. You know, prepared remarks, Jag, you talked about the setup here into the third and the fourth quarter, but as I understood it, you said that you still expect to be flat year over year from a revenue standpoint for commercial vehicles. I'm curious as to what gives you the confidence that you're going to be able to hit that guy.
Speaker Change: Okay, okay.
Speaker Change: Two questions on end market. I guess the first one is on commercial vehicle. In your prepared remarks, Jag, you talked about the setup here into the third and the fourth quarter. But as I understood it, you said that you still expect to be flat year over year from a revenue standpoint in commercial vehicle.
Speaker Change: I'm curious as to what gives you the confidence that you're going to be able to hit that guy. I understand that you all perform relatively well.
Jag Reddy: And I understand that you all perform relative to build by about double digits in Q2. But the degree of outperformance, especially as we look into Q4 relative to build, would be much more significant than what you've done thus far. So is it that these customers are ramping through the year, these new contracts are ramping through the year, or is there something else to be aware of? Yeah, on commercial vehicles.
Speaker Change: by about double digits in Q2, but the degree of outperformance, especially as we look into Q4 relative to build
Speaker Change: Would be much more significant than what you've done thus far, so is it that these customers are ramping through the year, these new contracts are ramping through the year, or is there something else to be aware of here?
Speaker Change: Yeah, on commercial vehicles.
Jag Reddy: In the first half, our customer bills outperformed our expectations, and we do expect the second half to slow down our customers to slow down their bill rate. And that's what we have planned from the beginning.
Speaker Change: The first half of our customer bills outperformed our expectations.
Speaker Change: And we do expect the second half to slow down, our customers to slow down their bill rates.
Speaker Change: And that's what we have planned from the beginning. Our confidence in hitting our forecast for...
Jag Reddy: Our confidence in hitting our forecast for the second half really depends on our customers' build rate projections and ACT forecasts of 308,000 vehicles for the year. Given that, even though we do expect some softness in the deceleration of build rates, given our new program launches and some of the share gains we've been talking about. Those increased sales to our end customers gives us confidence that we can hit our forecast. But to be clear here, you expect flat revenue in the commercial vehicle, even in the fourth quarter on a 23% build decline. Let me reiterate, we expect to be flat for the full year in our 2024 to 2023 results in our CB market. Okay, thank you for clarifying.
Speaker Change: The second half really relies on our customers' build-the-right projections and ACT forecasts of 308,000 vehicles for the year.
Speaker Change: Given that, even though we do expect some softness in the deceleration of build rates, given our new program launches and some of the share gains we've been talking about,
Speaker Change: Those increased sales to our end customers gives us confidence that, you know, we can hit our forecasted targets.
Speaker Change: But to be clear here, you expect to be flat revenue in commercial vehicle, even in the fourth quarter on a 23% build decline?
Speaker Change: Let me reiterate, we expect to be flat for the full year.
Speaker Change: In 2024 to 2023 results in our CB market.
Jag Reddy: And then finally, on agriculture. You already mentioned that large agriculture is under pressure. I think small ag is under pressure as well, with material production cuts that are coming across from older OEMs, you know, somewhere in the high 20s, low 30s in some cases. So, I'm sort of curious here as to how you think about this vertical specifically, especially as you differentiate between Q3 and Q4, because the pressure on the build rate seems to be varying between these two quarters by OEM. So, based on your customers, I'm kind of curious. Yeah, that's a good question, Meg.
Speaker Change: Okay, thank you for clarifying.
Speaker Change: You already mentioned that large agriculture is under pressure. I think small ag is under pressure as well. There's pretty material production cuts that are coming across from older OEMs, you know, somewhere in the high 20s, low 30s in some cases.
Speaker Change: So, I'm sort of curious here as to how you think about this vertical specifically, especially as you differentiate between Q3 and Q4, because the pressure on the build rate
Speaker Change: It seems to be varying between these two quarters by OEM, so based on your customers, I'm kind of curious as to how you...
Jag Reddy: We expect the overall ag market to be down mid-teens based on the programs we're on and the visibility we currently have. That breaks down approximately 15% or so for large ag and approximately 10% or so for small ag. That's for the end market. For us, we're currently projecting we're going to be down for the year by approximately 5% overall. That's because of some share gains we talked about, but there is also a lapping of some MSA ag revenues that came in during the first half.
Speaker Change: Thank you. Yeah, that's a good question, Mike. We expect the overall ag market to be down mid-teens.
Speaker Change: Unknown Speaker 0
Speaker Change: based on the programs we're on and the visibility we currently have.
Speaker Change: That breaks down approximately, you know, 15% or so for large ag and approximately 10% or so for the small ag.
Jag Reddy: If you put all of that together year over year, we will be down approximately 5% in the ag end market. But also, let me remind you that, overall, ag is only 9%, approximately 9% to 10%, max, of our overall sales. It is still one of our smaller end markets, slightly larger than our military market, which is approximately 6%. So even though the headlines, we see the headlines, we read our customers' public comments, but given where we are in the cycle, given our program wins, given our share gains, we feel like we can continue to outperform the agriculture end market. I appreciate it. If I can squeeze one more in, I'm sorry.
Speaker Change: That's what I'm marking.
Speaker Change: For us, we're currently projecting we're going to be down for the year.
Speaker Change: Approximately 5% overall, that's because of some share gains we talked about. There is also a lapping of some MSA revenues that came into the first half. If you put all of that together, year over year, we will be down approximately 5% in the aggregate.
Speaker Change: Ag End Market. Also, let me remind you that, you know, overall, ag is only 9%, approximately 9 to 10% max of our overall sales. It is still one of our smaller end markets, slightly larger than our military market, which is approximately 6%.
Speaker Change: So even though the headlines, we see the headlines, we read our customers' public comments.
Speaker Change: But given where we are in the cycle, given our program wins, given our share gains, we feel like we can continue to outperform the agriculture end market.
Jag Reddy: On the military, just as a quick reminder here, is your exposure in the Military predominantly on JLTV, or are there other programs that you have in there as well? Thank you. Yeah, so we have JLTV and FMTV are the two main programs we're on. Great, thank you. Good luck. Thank you.
Speaker Change: I appreciate it. If I can squeeze one more, I'm sorry.
Speaker Change: On the military, just as a quick reminder here, is your exposure in military predominantly on the JLTV, or are there other programs that you have in there as well? Thank you. Yes, and we have JLTV, FMTV are the two main programs we're on.
Speaker Change: Great, thank you. Good luck.
Ted Jackson: The next question comes from Ted Jackson with Northland Securities. You may proceed. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Ted Jackson with Northland Securities. You may proceed.
Ted Jackson: Congratulations on the quarter, guys. Okay, I've got a handful of questions. I'll try to run through them really quick.
Ted Jackson: Thank you very much. Congrats on the quarter, guys.
Jag Reddy: First of all, on the commercial vehicle, when you were giving the market data for growth, I caught the 11% growth with regard to 2026, but I missed what you said for 2025. Can you, do you have that in your head, Jag? Yeah, we expect the 2025 to be slightly higher, approximately 1% up versus 2024. Okay. And then when I think about that, I mean, that's market data, you know, you would expect at a minimum to grow in line with the market, you know, so I'm not saying that that's your guidance.
Ted Jackson: I got a handful of questions. I'll try to run through them really quick. First of all, on the commercial vehicle, when you were giving the market data for growth, I caught the 11% growth with regards to 2026, but I missed what you said for 2025. Can you, do you have that in your head, Jag?
Jag: Yeah, yeah, we expect the 2025 to be slightly, approximately 1% up versus 2024.
Jag: Okay. And then when I think about that, I mean, that's market data.
Speaker Change: you know, you would expect at a minimum to grow in line with market, you know, so I'm not saying that that's your guides. I'm just saying like, you know, if the market data and the projections hold true, that it would stand to reason that you would expect to see some modest growth in commercial vehicle in 25.
Jag Reddy: I'm just saying, you know, if the market data and the projections hold true, it would stand to reason that you would expect to see some modest growth in commercial vehicle sales in 2025. Yeah, even though, obviously, we're not providing any guidance for 2025. With that caveat, we expect to outperform the commercial vehicle market in. Okay. My second question goes over the power sports market. I mean, you just nailed it there.
Speaker Change: Yeah, even though obviously we're not providing any guidance for 2025, with that caveat, we expect to outperform the commercial vehicle market in 2025.
Speaker Change: Okay.
Speaker Change: My second question goes over into the power sports market. I mean, you just nailed it there. You know, I mean, it's the market, you know, as weak as anything you could imagine. And, you know, the project wins for you. It really allows you to, you know, pull through on that.
Ted Jackson: You know, I mean, the market is, you know, as weak as anything you could imagine. And, you know, the project wins for you if it would allow you to, you know, pull through on that. When we finish off this year and get into 25, you know, I mean, would there be more?
Speaker Change: When we finish off this year and get into 2025, you know, I mean,
Speaker Change: www.mustwatch.eu
Ted Jackson: Thank you so much for joining us today. I'm Randall Stille, and I'm going to talk to you a little bit about some of the stuff that would allow you to continue to, let's just call it, outperform the market. I'm not going to ask you to talk about market share, kind of market growth and stuff, but would you view 25 as being an arena where you would grow more in line with the market, or is there still some tail from all the new activity that you brought into your business in 24 that will carry forward into 25 and allow you to continue to, say, grow faster than that market share? In aggregate?
Speaker Change: Wait, is there more?
Speaker Change: stuff that would allow you to continue to, let's just call it outperformed market, I'm not going to ask for, you know, for you to, you know,
Jag Reddy: Let me first step back because you've been ramping, you know, you're ramping a lot of stuff through this year and kind of like, how does it tail into 25? Yeah, so, the discretionary nature of significant spend in the market At the same time, our customers have built up significant inventory in the channels as well. It's been a really great first half for us in the PowerSports market as we ramp up new customers.
Speaker Change: Let me first step back and say... I'm asking because you've been ramping, you know what I mean, you're ramping a lot of this stuff, you know, through this year and kind of like, how does it tail into 25 is where I'm going with this.
Speaker Change: At the same time, our customers have built up significant inventory in the channels as well.
Speaker Change: It's been a really great first half for us in power sports market as we ramp up new customers. We do expect the second half to moderate a bit our growth rates in the market. We will still grow and outperform the market.
Jag Reddy: We do expect the second half to moderate our growth rates in the market, but we will still grow and outperform the market. It'll be interesting to see what happens with interest rates and channel inventories with our customers as we go into 2025. There is a good possibility that we will outperform the market even in PowerSports next year. But sitting here, it's a little challenging to predict, right, you know, how that is all going to play out, given the interest rate environment we're currently in.
Speaker Change: It'll be interesting to see what happens with interest rates and channel inventories with our customers as we go into 2025.
Speaker Change: There is a good possibility that we will outperform the market even in power sports next year. But sitting here, it's a little challenging to predict, right, you know, how that is all going to play out given the interest rate environment we're currently in.
Jag Reddy: Yeah, I mean, I listened to all those calls. And there's, you know, the new product stuff they talk about is nice, but the market itself is just horrible. A question that I think will come close to your heart, Jag, and maybe somewhat fun.
Speaker Change: Yeah, I mean, I listened to all those calls. And there's, you know, I mean, the new product stuff they talk about is nice, but the market itself is just horrible.
Jag: A question that I think will come close to your heart, Jag, and maybe somewhat fun. I want to maybe to have you unpack a little bit about where you are in your journey for value-based pricing.
Jag Reddy: You know, I want to maybe have you unpack a little bit about where you are in your journey for value-based pricing. You know, I mean, it's, you know, you highlighted a lot, you talked about how it's improving your margin structure. You know, so if we think about mech and, you know, the revenue base that it has, maybe, you know, like, how much of your revenue have you converted over to this new pricing model?
Jag: You know, you highlighted a lot, you know, you talked about how it's improving your margin structure, you know, so if we think about
Jag Reddy: And, you know, how far can you take it, I guess, kind of, what do you see it in terms of the trajectory as we roll through 25 and beyond? As we indicated last time, Ted.
Speaker Change: How far can you take it, I guess, you know, kind of what do you see it in terms of trajectory as we roll through 25 and beyond?
Jag Reddy: Probably 15%, maybe less than 20% of our total sales are probably under the quote unquote, new pricing, i.e., value-based pricing. So what that gives us is a good, you know, three to four to five year runway to continue to convert existing core business to the new pricing model. So it's going to have some legs at the same time, right?
Speaker Change: So what that gives us is a good, you know, three to four to five year runway.
Speaker Change: to continue to convert existing core business
Stefan Neely: Unknown Executive, Stefan Neely
Jag Reddy: It's going to take some time as well, but it's both positive, as well, given that we can continue to leverage our pricing for the foreseeable future. Okay, my last question for you all is just maybe an update on the, You know, the sports equipment litigation kind of where you are with regard to that process, you know, maybe any change in terms of how you, you know, see it in terms of its resolution, just kind of an update on that front.
Speaker Change: Okay, my last question for you all is just maybe an update on the
Jag Reddy: Thanks. Sure. The discovery process continues with the litigation, and we expect the discovery phase to conclude in Q3, and we anticipate, potentially, a trial to begin either later this year or early 2025. We remain confident in a positive outcome for MEXT. Beyond that, we will not comment on the pending litigation.
Speaker Change: Sure. The discovery process continues with the litigation, and we expect the discovery phase to conclude in Q3 and anticipate potentially a trial to begin either later this year or early 2025.
Speaker Change: We remain confident in a positive outcome for MECC. Beyond that, we will not comment on the pending litigation.
Jag Reddy: Okay, great. It was worth asking. Congratulations again on the quarter. I'll talk to you guys soon. Thank you for listening. Thank you. The next comes from Ross Sparenblack with William Blair.
Speaker Change: Okay, great. It was worth asking. Congrats again on the quarter. I'll talk to you guys soon.
Speaker Change: Thank you. The next comes from Ross Sparenblack with William Blair. Your line is open.
Ross Sparenblack: Your line is open. Morning, Ross. Morning, Ross. Ross, your line is open. Please ensure you are unmuted.
Ross Sparenblack: Morning, Ross. Morning, Ross.
Speaker Change: Ross, your line is open. Please ensure you are unmuted.
Operator: The following question comes from Natalie Bach with Citigroup. You may proceed. Hi, good morning.
Speaker Change: The following question comes from Natalie Bach with Citigroup. You may proceed. Thank you.
Natalie Bach: Congratulations on the quarter. This is Natalia Bach on behalf of Andy Kaplitz from Citigroup. Good morning.
Speaker Change: Hi, good morning. This is Natalia Bach on behalf of Andy Kaplitz from Citigroup.
Jag Reddy: My first question that I want to ask is, with leverage now at slightly below 1.7 turns and you raising your free cash flow guidance for the year, how are you thinking about the potential for additional M&A activity? What impact does recent market volatility and current macroeconomic uncertainty have on how you and the board think about M&A in the current environment? Yeah, it's a really good place to be, Natalie.
Speaker Change: Good morning, everyone.
Natalia Bach: My first question that I want to ask is, with leverage now at slightly below 1.7 turns and you raising your speed cash flow guidance for the year, how are you thinking about the potential for incremental M&A activity? What impact does recent market volatility and current macroeconomic uncertainty have on how you and the board think about M&A in the current environment?
Jag Reddy: We are ahead of our schedule on our debt repayments, and as interest rates are working in our favor, as we indicated, 30 basis points of interest rate reduction in Q3 for us, given our leverage ratio, and potentially future interest rate cuts by the Fed gives us confidence that we can continue to pursue our capital allocation strategy. As indicated in our prepared remarks, we will put together a structured buyback program as well as continue to re-engage with potential M&A targets.
Speaker Change: Yeah, it's a really good place to be, Natalie. We are ahead of our schedule on our debt repayments.
Speaker Change: And as...
Speaker Change: Interest rates are working in our favor, as we indicated, 30 basis points of interest rate reduction.
Speaker Change: In Q3 for us, given our leverage ratio and potentially future interest rate cuts by Fed, gives us confidence that we can continue to pursue our capital allocation strategy.
Jag Reddy: Our pipeline remains strong, and we continue to stay close to the market, given that the multiples have remained consistent. We expect to pursue some attractive targets in our adjacent markets to beef up our offerings to our end customers, either in... Lightweight materials, energy transition, and other attractive end markets that will also help us with diversification in our end markets. Okay, helpful. And then just toning in on your construction access and market. Can you remind us of your mix of exposure to resi versus commercial construction equipment?
Speaker Change: As indicated in our prepared remarks, we will put together a structured buyback program as well as we continue to re-engage with potential M&A targets.
Speaker Change: Our pipeline remains strong, and we continue to stay close to the market, given that the multiples have remained consistent.
Jag Reddy: And how are you thinking about trends in residential versus commercial impacting your outlook for the constructional portion of your business going forward? Yeah, I don't think I can break down on the call RISD versus infrastructure. We have not given that breakout in the past.
Speaker Change: Okay, helpful. And then just toning in on your construction and access end market, can you remind us of your mix of exposure to Res-E risk commercial construction equipment, and how are you thinking about trends in Res-E risk commercial impacting your outlook for the constructional portion of your business going forward?
Jag Reddy: Having said that, our access versus construction is approximately 45 to 55. Here's the breakdown. In construction, though, we are seeing some modest signs of growth among our RISD exporters to the market. And infrastructure, particularly government and public infrastructure, could be a tailwind in the second half of 2024, but we need to watch our OEM inventories in the channel and then see how that continues to translate into sales and production for our end customers. The access market, though, continues to be strong. Our access customer has a strong backlog, which we expect to support our 2024 forecast. Okay, that's helpful. And then I'm just focusing on power sports.
Speaker Change: Yeah, I don't think I can break down on the call RISD versus infrastructure. We have not given that breakout in the past.
Speaker Change: Having said that, our access versus construction is approximately 45 to 55. That's the breakdown.
Speaker Change: In construction, though, we are seeing some modest signs of growth in our resin exporters to market.
Speaker Change: And infrastructure, particularly the government and public infrastructure, could be a tailwind in the second half of 2024, but we need to watch our OEM inventories in the channel and then see how that continues to translate into sales and production for our end customers.
Speaker Change: Access market, though, continues to be strong. Our access customer has strong backlog, which we expect to support our 2024 forecast.
Speaker Change: Okay, helpful. And then I'm just focusing on power sports. Can you just talk about what you're seeing and hearing from more of your consumer-facing customers in the end market?
Jag Reddy: Can you just talk about what you're hearing from more of your consumer facing customers in the end market? All of our end market customers have both consumer facing products and also what we call utility products. Utility demand has been stable and strong.
Speaker Change: All of our end market customers have both consumer facing products and also what we call as utility products.
Speaker Change: The utility demand has been stable and strong. We have gotten on new platforms and programs with multiple customers. As we discussed last time, we brought on some new customers to MEC this year. All of that is helping us stabilize and grow in this end market with a pretty sizable contraction in actual end market sales.
Jag Reddy: We have got on new platforms and programs with multiple customers. As we discussed last time, we brought in some new customers to MEC this year. All of that is helping us stabilize and grow in this end market with a pretty sizable contraction in actual end market sales. We see that discretionary spend, i.e. The recreational side of the market continues to be soft, and our customers continue to have excess inventory in the channel.
Speaker Change: We see that discretionary spend, i.e. the recreational side of the market, continues to be soft and our customers continue to have excess inventory in the channel. We all can see the marketing programs that are running to clear the channel inventories.
Jag Reddy: We all can see the marketing programs that are running to clear the channel inventories, so we'll have to see how that plays out. And our expectation is that if there is any movement in the interest rates in the coming quarters, that will only be a tailwind for us either in Q4 or going into 2025. Okay, that's helpful, Kala.
Speaker Change: So, we'll have to see how it plays out, and our expectation is that if there's any movement in interest rates in the coming quarters, that'll only be a tailwind for us, either in 2024 or going into 2025.
Jag Reddy: And then, one last question for me. You mentioned how the continued ramp-up of new project work should help offset some of the expected softness in a few end markets in the second half. Maybe can you talk about how these new projects should help flow through the P&L over the coming quarters and how we should think about that potentially impacting the top line and reported profitability over the next few quarters? So when you think about the markets, right?
Speaker Change: Okay, that's helpful, Kala. And then one last question for me. You mentioned how the continued ramp-up of new project work should help offset some of the expected softness with you and markets in the second half.
Speaker Change: And maybe can you talk about how these new projects should help flow through the P&L over the coming quarters and how we should think about that potentially impacting top line and reported profitability over the next few quarters?
Todd Butz: As we said on the last call, we've made significant gains in power sports, and we've made significant gains in CV, which will again offset or mitigate, right, some of the declines that we're seeing in end market demand. On the top line, given that CV is 38% of our overall sales, we do expect sequentially, going from second quarter to third quarter, we will see about a maybe 6% to 8% decline in top line revenue versus a 20 plus percent decline in the CV market alone. And then when you look at Q4, it's more of a modest decline, maybe 1% to 3%.
Speaker Change: So, when you, uh,
Speaker Change: Think about the markets, right? We've said on the last call, we've made significant gains in power sports, we've made significant gains in PV, which will again offset or mitigate, right, some of the declines that we're seeing on the end market demand.
Speaker Change: On the top line, you know, given that, you know, CV is, you know, 38% of our overall sales.
Speaker Change: We do expect.
Speaker Change: Sequentially, you know, going from second quarter, the third quarter, we will see about a maybe six to 8% decline in top line revenue, you know, versus a seven, you know, 20 plus percent decline in that, you know, CV market alone.
Todd Butz: From a P&L perspective, the fundamental building blocks that we've put in place already as it relates to MBX and other lean initiatives of commercial pricing are there, right? And they really, you can see the results in Q1 and Q2 to have a very positive impact on our, you know, bottom line financial performance. But as you enter the second half, given that CV does have a pretty sizable downturn, that will impact, you know, some of our larger facilities.
Speaker Change: And then when you look at Q4, more of a modest decline, maybe 1% to 3%. From a P&L perspective, you know, the fundamental building blocks that we've put in place already as it relates to MBX.
Speaker Change: Other lean initiatives of commercial pricing are there, right? And they're really, you can see the results in Q1 and Q2 to have a very positive impact on our, you know, bottom line financial performance.
Speaker Change: But as you enter the second half, given that CV does have a pretty sizable downturn,
Speaker Change: That will impact.
Speaker Change: you know, some of our larger facilities. So we will, you know, have a little bit of a maybe a tempered margin progression in the second half, as these facilities would be, you know, slightly underutilized, you know, due to overhead absorption. But generally speaking, when we think about margin progression, in our 14 to 16% goal, we feel we have the pieces in place to build upon to continue margin progression, even in a down market, albeit, it'll be very, you know, tempted, I would say in Q3 and Q4.
Todd Butz: So we will, you know, have a little bit of a, maybe a tempered margin progression in the second half, as these facilities would be, you know, slightly underused due to overhead absorption. But generally speaking, when we think about margin progression and our 14 to 16% goal, we feel we have the pieces in place to build upon to continue margin progression, even in a down market, albeit, it'll be very, you know, tempted, I would say in Q3 and Q4. Okay, I got it.
Todd Butz: Very helpful. Congratulations on the quarter and thank you for taking all my questions. Thank you. Thank you. The final question comes from Ross Barron-Black with William Blair. You may proceed. Hey, good morning, guys. Good morning, Ross. All right, you can hear me. Apologies for the technical difficulties there.
Speaker Change: Okay, got it. Very helpful. Congrats on the quarter and thank you for taking all of my questions.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you. The final question comes from Ross Barron-Black with William Blair. You may proceed.
Ross Barron-Black: Hey, good morning, guys.
Ross Barron-Black: Maybe sticking on the margins, you know, as we think about kind of the second half, maybe a little bit softer on the end market. But you have done excellent work with NVX. What would expectations be for maybe decrements, given the work that has been done, if it's maybe a little bit worse than expected in the second half of the year? No, I wouldn't characterize it that way. I think the decrements will be a little bit. Our historical decrement is around 17.5%. And I would say that we're at or maybe slightly below that as we stand today.
Speaker Change: Good morning, Ross. Good morning, Ross.
Ross Barron-Black: All right, you can hear me. Apologies for technical difficulties there. Maybe sticking on the margins, you know, as we think about kind of the second half, maybe a little bit softer on the end market. But you have done excellent work with NVX. What would expectations be for maybe decrementals, given the work that has been done?
Speaker Change: If it's maybe a little bit worse than expected in the second half of the year.
Speaker Change: No, I wouldn't characterize, I think the decremental will be a little bit, our historical decremental is around 17 and a half percent.
Speaker Change: And I would say that we're at or maybe slightly below that as we stand today. You know, I would expect and we do expect to continue to see the positive impact of MDX and commercial pricing and other initiatives in the second half. But like I just mentioned.
Todd Butz: You know, I would expect, and we do expect to continue to see the positive impact of MDX and commercial pricing and other initiatives in the second half. But, like I just mentioned, that will be buffered, you know, be mitigated by, unfortunately, the pressure of underutilization at a few of our larger facilities. But generally speaking, I would expect margin progression to continue in Q3 and Q4, but at a much lower pace than what we saw in Q2.
Speaker Change: That will buffer, you know, be mitigated by unfortunately the pressure of underutilization at a few of our larger facilities.
Speaker Change: But generally speaking, I would expect margin progression to continue in Q3 and Q4, but at a much lower pace than what we saw from Q2 to Q3.
Todd Butz: Just to add to that, Ross, we are actively looking at all the levers we have at our disposal. As we expect the volumes to come down, particularly in some large facilities and significant operations, we're looking at every level, including cutting back on overtime and really following strict checkbook processes to make sure that our variable spend is down.
Speaker Change: Just to add to that, Ross, we are actively...
Ross: Looking at all the levers we have at our disposal as we expect the volumes to come down, particularly in some large facilities and significant operations.
Speaker Change: We're looking at every level, including cutting back on overtime.
Jag Reddy: We're looking at resizing our workforce in a couple of our facilities that are either seeing or expected to see some significant volume reduction. So we're taking all the actions necessary for the second half for us to continue to drive the revenue and margin progression as we need. Okay, and maybe just on capacity, when we think about, you know, excess, I think maybe there's 10 million left to go get at Hazel Park.
Speaker Change: So, you know, really following strict checkbook processes to make sure that our variable spend is down. We're looking at resizing our workforce in a couple of our facilities that are either seeing or expected to see some significant volume reduction. So, we're taking all the actions necessary for the second half for us to continue to drive the revenue and margin progression as we laid out.
Ross Barron-Black: But just the company as a whole, where do you guys stand today? And how should we frame, you know, all the wins in the second quarter as contributing to the next four quarters' revenue, trying to support that? So the first point I would add is that we're continuing to make good progress with the ramp-up of Hazel. That gap that you highlighted, we continue to work that gap down. The pipeline that our sales team has developed is really strong, and we are continuing to focus on closing those opportunities to be able to add to that gap that you mentioned. So sitting here, we feel pretty good about our exit rate out of Hazel Park in 2020. Perfect. And just one more if I can on Hazel Park.
Speaker Change: Okay, and maybe just on capacity, when we think about, you know, excess, I think maybe there's 10 million left to go get at Hazel Park, but just company as a whole, where do you guys stay in the day? And how should we frame, you know, all the wins in the second quarter as contributing to the next?
Speaker Change: Four quarters the revenue, trying to support that. Yeah.
Speaker Change: So, the first point I would add is we're continuing to make good progress with the ramp-up of Hazel Park.
Speaker Change: That gap that you highlighted.
Speaker Change: We continue to work that gap down. The pipeline that our sales team has developed is really strong, and we are continuing to focus on closing those opportunities to be able to add to that gap that you mentioned. So sitting here, we feel pretty good about our exit rate out of Hazel Park in 2024.
Jag Reddy: Is there anything that we should call out in the modeling as we think about the cadence of the sport and the markets ramping up? Parasports is obviously, you know, having a good year this year. Is ag maybe at 25, 26?
Speaker Change: Perfect. And just one more if I can on Hazel Park. Is there anything that we should call out in the modeling as we think about the cadence of the sport and markets ramping? Power Sports is obviously, you know, having a good year this year. Is ag maybe at 25, 26? Or is it anything, you know?
Ross Barron-Black: Or is it something, you know? with that cadence that we should be aware of? Yeah, I wish I could predict the ag market downturn or the duration of the downturn, right? We'll just have to watch it really closely. And then as we exit the year, we'll have a better idea where interest rates stand and where yields and crop prices stand at the end of the year. But also, I want to remind everyone that agriculture is only 9% of our overall business, right? You know, yes, the headlines are very negative.
Speaker Change: with that cadence that we should be aware of. I wish I could predict the ag market downturn or the...
Speaker Change: So, we'll just have to watch it really closely and then as we exit the year, right, we'll have a better idea where interest rates stand and where, you know, yields and crop prices stand at the end of the year. But also, I want to remind everyone that ag is only 9% of our overall business, right? You know, yes, the headlines are very negative, but at the same time, it's still a small portion of our overall business.
Jag Reddy: But at the same time, it's still a small portion of our overall business. Okay, so the ramping of these programs isn't fully insulated from the overall market, the takeaway, whereas Powersports clearly is. Yep, agree. Awesome, guys. Well, yeah, congrats on the quarter. Thanks for the questions. Thanks, Rob. Thanks, Rob. Thank you. There are currently no other questions at this time.
Speaker Change: Okay, so the ramping of these programs isn't fully insulated from the overall market is the takeaway, whereas power sports, it clearly is.
Speaker Change: Yep, agree.
Speaker Change: Oh, perfect. Awesome, guys. Well, yeah, congrats on the quarter. Thanks for the questions.
Operator: I will pass it back over to the management team for closing remarks. 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 or Stephan Neely at Valum, our Investor Relations Council.
Rob: Thanks, Rob. Thanks, Rob.
Speaker Change #101: Thank you. There are currently no other questions at this time. I will pass it back over to the management team for closing remarks.
Operator: This concludes our call today. You may now disconnect. This concludes the conference call. Thank you for your participation. You may now disconnect your line.
Speaker Change #102: 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 or Stephan Neely at Valum, our Investors Relations Council. This concludes our call today. You may now disconnect.
Speaker Change #102: Hello, everybody. I'm Stefan Neely. Thank you for tuning in. I'm Todd Butz. And I'm Stefan Neely. Thank you so much for watching. And I'll see you next time. Bye.