Q2 2025 Mayville Engineering Co Inc Earnings Call
Inflation you can register question by pressing Star followed by one on your kind of thinking about it.
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I will now hand over to your host Stefan Neely with Vallum advisors to begin.
Please go ahead Stephane.
Thank you operator on behalf of our entire team I'd like to welcome you to our second quarter 2025 results conference call, leading the call today is <unk>, President and CEO, Jack ready and Michelle layer Chief Financial Officer.
Today's discussion contains forward looking statements about future business and financial expectations.
<unk> results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission, except as required by law, we undertake no obligation to update our forward looking statements.
Speaker #1: Hello, everyone. And thank you for joining the Mayville Engineering Company second quarter 2025 earnings call. My name is Sammy, and I'll be coordinating your call today.
This call will include the discussion of certain non-GAAP financial measures reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at Mec, Inc. Dot com. Following our prepared remarks, we will open the line for questions with that I would like to turn the call over to Jack.
Speaker #1: During the presentation, you can register questions by pressing star, followed by one on your telephone keypad. If you change your mind, please press star, followed by two on your telephone keypad to remove yourself from the question queue.
Thank you Stephan and good morning, everyone.
Speaker #1: I'll now hand over to your host, Stefan Neely, with Vallam Advisors, to begin. Please go ahead, Stefan.
During the second quarter, we remain focused on executing our mdx value creation framework, notably our adjusted EBITDA margin expanded by 130 basis points sequentially. Despite a 2% decline in net sales be.
Speaker #2: Thank ou, operator. On behalf of our entire team, I'd like to welcome you to our second quarter 2025 results conference call. Leading the call today is my ex-president and CEO, Jagadeesh Reddy, and Rachele Lehr, Chief Financial Officer.
These results underscore the effectiveness of our cost management initiatives and our team's disciplined approach to improving operating leverage.
Speaker #2: Today's discussion contains forward-looking statements about future business and financial expectations, actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission.
As previously announced we completed the acquisition of <unk> at the beginning of July.
Speaker #2: Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures, reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mechinc.com.
This transaction represents a significant milestone in our transformation as we continue to execute our commercial growth strategy.
We remain focused on increasing share of wallet with existing customers and expanding into high growth adjacent end markets to diversify both our revenue base and customer mix.
Speaker #2: Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.
Speaker #3: Thank you, Stefan, and good morning, everyone. During the second quarter, we remain focused on executing our MBX value creation framework, notably our adjusted EBITDA margin expanded by 130 basis points sequentially despite a 2% decline in net sales.
<unk> accurate fab provides diversification into the critical power and data center end market visa.
These are two segments with compelling long term secular tailwind, while the transaction will be modestly accretive to earnings this year.
<unk> opportunity lies in market access and platform leverage addressing unfulfilled demand.
Speaker #3: These results underscore the effectiveness of our cost management initiatives under our team's disciplined approach to improving operating leverage. As previously announced, we completed the acquisition of Accufab at the beginning of July.
The acquisition increases our estimated serviceable addressable market by approximately 60% to approximately $8 billion.
In addition, we see meaningful near term opportunities to drive both revenue and cost synergies by leveraging our proven integration playbook and implementing our mdx framework.
Speaker #3: This transaction represents a significant milestone in our transformation, as we continue to execute our commercial growth strategy. We remain focused on increasing share of wallet with existing customers and expanding into high-growth adjacent end markets to diversify both our revenue base and customer mix.
We have already begun executing with strong momentum as the team has deployed lean events at both locations.
For reference or the two year period since we acquired mid stages aluminum our MSA our implementation of the Mdx framework has improved their adjusted EBITDA margins from approximately 20% to over 30%. This is well ahead of our initial expect.
Speaker #3: The addition of Accufab provides diversification into the critical power and data center end market. These are two segments with compelling long-term secular tailwinds, while the transaction will be modestly accretive to earnings this year, a broader opportunity lies in market access and platform leverage, addressing unfulfilled demand.
Patients.
Furthermore, MSA has been a source of growth within our business even in the current environment as sales have grown an average of eight 4% through the first two quarters of 2025.
Speaker #3: This acquisition increases our estimated serviceable addressable market by approximately 60% to approximately $8 billion. In addition, we see meaningful near-term opportunities to drive both revenue and cost synergies by leveraging our proven integration playbook and implementing our MBX framework.
Given <unk> high value commercial opportunities with them rapidly growing end markets, we look forward to unlocking the growth and value creation through this acquisition.
Looking ahead, we have updated our 2025 financial guidance to reflect both the contribution of the <unk> acquisition and the demand environment in our core end markets since our last earnings call customer orders and the majority of our key end markets have remained soft.
Speaker #3: We have already begun executing with strong momentum as the team has deployed lean events at both locations. For reference, over the two-year period, since we acquired mid-stage aluminum, or MSA, our implementation of the MBX framework has improved their adjusted EBITDA margins from approximately 20% to over 30%, this is well ahead of our initial expectations.
Many customers, particularly in the commercial vehicle power sports and agriculture markets continue to scale back production capacity.
Although channel inventory levels in select end markets have shown modest improvement over the past six months.
Speaker #3: Furthermore, MSA has been a source growth. Within our business, even in the current environment, as sales have grown an average of 8.4% through the first two quarters of 2025.
Soft end user demand is prolonged <unk> the duration of the Destocking cycles.
In the commercial vehicle market, specifically elevated inventory levels persist.
Amid ongoing uncertainties surrounding 2027, EPA regulations and pre buy timing that was previously expected later this year, reflecting this the most recent ACD forecast projects 2025 commercial vehicle production at approximately.
Speaker #3: Given Accufab's high value commercial opportunities within rapidly growing end markets, we look forward to unlocking the growth and value creation through this acquisition. Looking ahead, we have updated our 2025 financial guidance to reflect both the contribution of the Accufab acquisition and the demand environment in our core end markets.
Lately 252000 units, a 24% decline compared to 2024.
Speaker #3: Since our last earnings call, customer orders in the majority of our key end markets have remained soft. Many customers, particularly in commercial vehicle power sports and agriculture markets, continue to scale back production capacity.
This weaker outlook is consistent with the order patterns. We are currently seeing from our customers.
Given these trends we are no longer expecting is second half recovery in market demand that said, we remain focused on what we can control.
Speaker #3: Although channel inventory levels in select end markets have shown modest improvement over the past six months, soft end-user demand is prolonging the duration of the destocking cycles.
We have recently launched initiatives aimed at further reducing our fixed cost base.
<unk> asset capacity to optimize our manufacturing footprint. These actions are intended to improve our operating leverage over time without compromising our workforce and ability to scale production once demand begins to recover.
Speaker #3: In the commercial vehicle market, specifically elevated inventory levels persist amid ongoing uncertainties surrounding 2027 EPA regulations and pre-buy timing. That was previously expected later this year.
Turning now to an overview of substantial new business wins during the second quarter.
Speaker #3: Reflecting this, the most recent ACT forecast projects 2025 commercial vehicle production at approximately 252,000 units, a 24% decline compared 2024. This weaker outlook is consistent with the order patterns we are currently seeing from our customers.
I am pleased to share that our team is tracking ahead of pace to achieve our annual goal of $100 million in new business awards for the year.
First we're excited to share that we have secured our first cross selling win after the acquisition of <unk>.
We were able to quickly capitalize on the strength of the market.
Speaker #3: Given these trends, we are no longer expecting a second half recovery in market demand. That said, we remain focused on what we can control.
Securing an award for datacenter fabrications. This will launch in the third quarter and generate revenues for Mac. This year.
Speaker #3: We have recently launched initiatives aimed at further reducing our fixed cost base, rationalizing asset capacity, to optimize our manufacturing footprint. These actions are intended to improve our operating leverage over time without compromising our workforce and ability to scale production once demand begins to recover.
Building on strategic wins last quarter, we further expanded our market share with our access customer as they shift their global supply base.
Our U S manufacturing footprint near this customer remains a key differentiator.
In the quarter, we secured additional commercial vehicle wins tied to the 2026 and 2027 model updates driven by the upcoming regulation changes.
Speaker #3: Turning now to an overview of substantial new business wins during the second quarter. I am pleased to share that our team is tracking ahead of pace to achieve our annual goal of $100 million in new business awards for the year.
We expect to capture further market share in the quarters ahead.
Within the critical power end market, we continue to see additional wins related to power generation securing multiple awards for engine programs launching during the fourth quarter.
Speaker #3: First, we're excited to share that we have secured our first cross-selling win after the acquisition of Accufab. We were able to quickly capitalize on the strength of the market, securing an award for data center fabrications, this will launch in the third quarter and generate revenues for mech this year.
Lastly, we continue to see some additional wins related to specific applications for additional battery thermal management units. We have continued to build out this product line as our relationship with this customer continues to grow.
Speaker #3: Building on strategic wins last quarter, we further expanded our market share with our access customer as they shift their global supply base. Our US manufacturing footprint near this customer remains a key differentiator.
These wins further reinforced the strength of our comprehensive offering and fully domestic manufacturing footprint.
Despite broader market softness we continue to secure new awards and have not lost any significant customer programs.
Speaker #3: In the quarter, we secured additional commercial vehicle wins tied to 2026 and 2027 model updates driven by the upcoming regulation changes. We expect to capture further market share in the quarters ahead.
And as we deepen relationships within <unk> customer base, we see meaningful opportunities to accelerate growth in high value markets that remain underserved.
Our continued emphasis on working capital efficiency generated $12 $5 million in free cash flow, resulting in free cash flow conversion of 92% of adjusted EBITDA during the second quarter.
Speaker #3: Within the critical power end market, we continue to see additional wins related to power generation securing multiple awards for engine programs launching during the fourth quarter.
Speaker #3: Lastly, we continue to see some additional wins related to specific applications for additional battery thermal management units. We have continued to build out this product line as our relationship with this customer continues to grow.
Consistent with our capital allocation framework, we deployed this cash flow towards the repayment of debt and planned share repurchases. Following the closing of the <unk> acquisition, our pro forma net leverage increased to approximately three one times up from one four.
Speaker #3: These wins further reinforce the strength of our comprehensive offering and fully domestic manufacturing footprint. Despite broader market softness, we continue to secure new awards and have not lost any significant customer programs.
Times at the end of the second quarter.
Our primary focus will be on utilizing free cash flow to repay our debt targeting below two times by end of the year 2026.
We repurchased $2 9 million of common stock under our share repurchase program during the quarter.
Speaker #3: As we deepen relationships within Accufab's customer base, we see meaningful opportunities to accelerate growth in high-value markets that remain underserved. Our continued emphasis on working capital efficiency generated $12.5 million in free cash flow resulting in free cash flow conversion of 92% of adjusted EBITDA during the second quarter.
Year to date, we have repurchased $4 6 million. This is near our previously announced annual commitment of $5 million to $6 million.
Offsetting the dilution from our annual stock compensation Awards.
Beyond our minimum repurchase threshold, we will evaluate additional repurchases using a returns based approach that takes into consideration opportunities to grow our business.
Speaker #3: Consistent with our capital allocation framework, we deployed this cash flow toward the repayment of debt and planned share repurchases. Following the closing of the Accufab acquisition, our pro forma net leverage increased to approximately $3.1 times up from $1.4 times at the end of the second quarter.
Before turning it over to Rochelle, I want to address our 2026 financial targets.
Given the current macro environment, we are withdrawing the 2026 targets issued at our 2023 Investor day.
Speaker #3: Our primary focus will be on utilizing free cash flow to repay our debt targeting below two times by the end of the year 2026.
These prior targets assumed a normalized market demand environment that said, we continue to believe the financial profile implied by those targets is achievable once demand normalizes, even before factoring the strategic benefits of the Acura Fab acquisition.
Speaker #3: We repurchased $2.9 million of common stock under our share repurchase program during the quarter. Year-to-date, we have repurchased $4.6 million dollars. This is near our previously announced annual commitment of $5 to $6 million dollars offsetting the dilution from our annual stock compensation awards.
Looking beyond 2025, we are focused on building <unk> into a scaled diversified domestic fabricator.
We believe our platform can ultimately achieve the $1 billion in revenue and adjusted EBITDA margins exceeding 15%.
Speaker #3: Beyond our minimum repurchase threshold, we will evaluate additional repurchases using a returns-based approach that takes into consideration opportunities to grow our business. Before turning it to Rachele, I want to address our 2026 financial targets.
We believe this long term profile reflects the earnings power of our current platform supported by organic growth disciplined M&A and consistent operational execution.
As we gain better visibility into a recovery across our core markets, we will share a comprehensive update to our multiyear targets and strategic priorities.
Speaker #3: Given the current macro environment, we are withdrawing the 2026 targets issued at our 2023 investor day. These prior targets assumed a normalized market demand environment.
In the meantime, we are excited by the progress, we're making with our <unk> acquisition customer engagement has been strong.
Speaker #3: That said, we continue to believe the financial profile implied by those targets is achievable once demand normalizes even before factoring the strategic benefits of the Accufab acquisition.
Drilling opportunities, we had not originally anticipated.
As a result, we expect to recognize $5 million to $10 million of revenue synergies from the acquisition in 2026.
Speaker #3: Looking beyond 2025, we are focused on building mech into a scaled diversified domestic fabricator. We believe our platform can ultimately achieve a billion dollars in revenue and adjusted EBITDA margins exceeding 15%.
Two years ahead of schedule.
By 2028, we expect that the acquisition could generate $15 million to $20 million in total revenue synergies. This is driven in part by the double digit growth that we expect in the critical power and data center end market.
Speaker #3: We believe this long-term profile reflects the earnings power of our current platform, supported by organic growth, disciplined M&A, and consistent operational execution. As we gain better visibility into a recovery across our core markets, we will share a comprehensive update to our multi-year targets and strategic priorities.
These early results reinforce the efficacy of our strategy.
Our legacy customer relationships continue to provide foundational strength, while our expansion into high growth high value adjacent markets is accelerating the transformation of Mac into a more balanced high margin platform.
With reinsurance trans gaining momentum we believe our U S based manufacturing footprint provides us with a durable competitive advantage.
Speaker #3: In the meantime, we are excited by the progress we're making with our Accufab acquisition. Customer engagement has been strong, revealing opportunities we had not originally anticipated.
As we exit this down cycle, we are confident that Mac is uniquely positioned to deliver above market growth and profitability.
Speaker #3: As a result, we expect to recognize $5 million to $10 million of revenue synergies from the acquisition in 2026, two years ahead of schedule.
I'm incredibly proud of the progress our team has made and remain confident in our ability to deliver sustainable long term value for both our customers and shareholders. The mdx framework is enabling us to improve our operating leverage and prepare for the next.
Speaker #3: By 2028, we expect that the acquisition could generate $15 to $20 million in total revenue synergies. This is driven in part by the double-digit growth that we expect in the critical power and data center and market.
Phase of growth with that I will now turn the call over to Rochelle to review our financial results.
Speaker #3: These early results reinforce the efficacy of our strategy. Our legacy customer relationships continue to provide foundational strength while our expansion into high-growth, high-value adjacent markets is accelerating the transformation of mech into a more balanced, high-margin platform.
Thank you Jack and good morning, everyone.
Sales for the second quarter decreased 19, 1% on a year over year basis to $132 3 million.
Soft customer demand across most of the company's key end markets.
Speaker #3: With reassuring trends gaining momentum, we believe our US-based manufacturing footprint provides us with a durable, competitive advantage. As we exit this down cycle, we are confident that mech is uniquely positioned to deliver above-market growth and profitability.
And channel inventory Destocking was partially offset by volume from new projects and demand for aluminum extrusion and the other end market and increased aftermarket demand in the military end market.
Our manufacturing margin was $13 $6 million in the second quarter as compared to $22 $3 million in the same prior year period.
Speaker #3: I'm incredibly proud of the progress our team has made and remain confident in our ability to deliver sustainable, long-term value for both our customers and shareholders.
The decrease was primarily driven by lower customer demand, partially offset by cost reduction activities.
Speaker #3: The MBX framework is enabling us to improve our operating leverage and prepare for the next phase of growth. With that, I will now turn the call over to Rachele to review our cial results.
Our manufacturing margin rate was 10, 3% for the second quarter of 2025% compared to 13, 6% for the prior year period.
The decrease in our manufacturing margin rate was attributable to lower fixed cost absorption from lower sales, partially offset by cost reduction actions.
Speaker #4: Thank you, Jag. And good morning, everyone. Total sales for the second quarter decreased 19.1% on a year-over-year basis to $132.3 million. Soft customer demand across most of the company's key end markets and channel inventory destocking was partially offset by volume from new projects and demand for aluminum extrusions in the other end market.
Other selling general and administrative expenses were $10 3 million for the second quarter of 2025, or seven 8% of net sales as compared to $8 $3 million at the same prior year period or 5% of net sales.
The increase in these expenses during the second quarter, primarily reflects nonrecurring costs associated with the <unk> acquisition and CFO transition.
Speaker #4: An increased aftermarket demand in the military end market. Our manufacturing margin was 13.6 million dollars in the second quarter, as compared to 22.3 million dollars in the same prior year period.
As part of the ongoing integration efforts, we expect that our operating expenses during the second half of the year will reflect approximately $2 million and integration expenses.
Speaker #4: The decrease was primarily driven by lower customer demand, partially offset by cost reduction activities. Our manufacturing margin rate was 10.3% for the second quarter of 2025.
Outside of these onetime costs, we continue to target long term SG&A to remain in a normalized range of between four and a half to five 5% of sales.
Speaker #4: Compared to 13.6% for the prior year period, the decrease in our manufacturing margin rate was attributable to lower fixed cost absorption from lower sales partially offset by cost reduction actions.
Interest expense was $1 $4 million for the second quarter of 2025 as compared to $3 million in the prior year period due to a decrease in borrowings and lower interest rates relative to the second quarter of last year.
Speaker #4: Other selling general and administrative expenses were 10.3 million dollars for the second quarter of 2025, or $7.8% of net sales, as compared to $8.3 million dollars for the same prior year period, or 5% of net sales.
Adjusted EBITDA for the second quarter was $13 7 million.
Versus $19 6 million for the same prior year period.
Adjusted EBITDA margin percent decreased by 170 basis points to 10, 3% in the current quarter as compared to 12% for the same prior year period.
Speaker #4: The increase in these expenses during the second quarter primarily reflects non-recurring costs associated with the Accufab acquisition and CFO transition. As part of the ongoing integration efforts, we expect that our operating expenses during the second half of year will reflect approximately $2 million dollars in integration expenses.
The decrease in our adjusted EBITA margin was attributable to lower customer demand, partially offset by cost rationalization.
Turning now to our statement of cash flows and balance sheet.
Free cash flow during the second quarter of 2025 was $12 5 million as compared to $19 2 million in the prior year period.
Speaker #4: Outside of these one-time costs, we continue to target our long-term SG&A to remain in a normalized range of between four and a half to five and a half percent of sales.
The decrease in free cash flow as compared to the prior year reflects less cash generated from operating activities.
Partially offset by a reduction in capital expenditures.
Speaker #4: Interest expense was 1.4 million dollars for the second quarter of 2025, as compared to $3 million dollars in the prior year period due to a decrease in borrowings and lower interest rates relative to the second quarter of last year.
As of the end of the second quarter of 2025, our debt, which includes bank debt financing agreements and finance lease obligations was $72 million.
Down from $125 $4 million at the end of the second quarter of 2024 and resulted in a net leverage ratio of one four times as of June 30th.
Speaker #4: Adjusted EBITDA for the second quarter was 13.7 million dollars versus 19.6 million dollars for the same prior year period. Adjusted EBITDA margin percent decreased by 170 basis points to 10.3% in the current quarter, as compared to 12% for the same prior year period.
Additionally on June 26, we entered into the first amendment to our amended and restated credit agreement.
The first amendment provides for an additional $100 million of availability under our credit facility by exercising the previously available $100 million accordion feature.
Speaker #4: The decrease in our adjusted EBITDA margin was attributable to lower customer demand, partially offset by cost rationalization. Turning now to our statement of cash flows and balance sheet.
I would also note that our credit agreement includes a four quarter leverage holiday following an acquisition increasing our maximum net leverage ratio to four times for the next year.
Speaker #4: Free cash flow during the second quarter of 2025 was 12.5 million, as compared to 19.2 million dollars in the prior year period. The decrease in free cash flow, as compared to prior year, reflects less cash generated from operating activities, partially offset by a reduction in capital expenditures.
Now turning to a review of our 2025 financial guidance.
We are updating our 2025 financial guidance to reflect the expected impact of the accurate fab acquisition and the current demand environment within our legacy end markets. We now expect net sales for the full year of 2025 to be between $528 million and $562 million.
Speaker #4: As of the end of the second quarter of 2025, our debt, which includes bank debt, financing agreements, and finance lease obligations, was 72 million dollars.
Speaker #4: Down from 125.4 million dollars at the end of the second quarter of 2024 and resulted in a net leverage ratio of 1.4 times as of June 30th.
Adjusted EBITDA of between 49 million to $55 million and.
And free cash flow of between 25 million to $31 million.
Speaker #4: Additionally, on June 26th, we entered into the first amendment to our amended and restated credit agreement. The first amendment provides for an additional $100 million of availability under our credit facility by exercising the previously available $100 million accordion feature.
Our updated guidance range includes the expected $28 million to $32 million of incremental revenues and $6 million to $8 million of incremental adjusted EBITDA associated with the <unk> acquisition.
I would also note that beginning in the third quarter of this year, we will begin reporting revenues in the critical power and data center end market.
Speaker #4: I would also note that our credit agreement includes a four-quarter leverage holiday following an acquisition. Increasing our maximum net leverage ratio to four times for the next year.
We expect this newly reported end market will be approximately 10% of our trailing 12 months revenue.
Additionally, this end market will include a portion of accurate fab customer sales along with a portion of Max legacy customer sales currently captured within our other end market.
Speaker #4: Now turning to a review of our 2025 financial guidance. We are updating our 2025 financial guidance to reflect the expected impact of the Accufab acquisition and the current demand environment within our legacy end markets.
As it relates to our legacy end markets. Our updated guidance reflects the expectation of demand to remain muted in the majority of our key end markets throughout the remainder of the year.
Speaker #4: We now expect net sales for the full year of 2025 to be between $528 million and $562 million dollars. Adjusted EBITDA of between $49 million to $55 million dollars and free cash flow of between $25 million to $31 million dollars.
Sequentially, we expect the third quarter revenue to decline low single digits, followed by a high single digit decline in the fourth quarter.
Furthermore, embedded within our 2025, adjusted EBITDA guidance as the benefit of $1 million to $2 million of cost improvement driven by our mdx operational excellence and strategic value based pricing initiatives net of inflationary pressures.
Speaker #4: Our updated guidance range includes the expected 28 to 32 million dollars of incremental revenues and 6 to 8 million dollars of incremental adjusted EBITDA associated with the Accufab acquisition.
As it relates to free cash flow guidance.
Speaker #4: I would also note that beginning in third quarter of this year, we will begin reporting revenues in the critical power and data center end market.
<unk> that our capital expenditures for the year will remain in the range of between 13 and $17 million.
Additionally, our free cash flow guidance includes $5 million to $6 million of nonrecurring costs related to the CFO transition and the active fab acquisition.
Speaker #4: We expect this newly reported end market will be approximately 10% of our trailing 12 months' venue. Additionally, this end market will include a portion of Accufab customer sales.
Speaker #4: Along with a portion of mech's legacy customer sales, currently captured within our other end market. As it relates to our legacy end markets, our updated guidance reflects the expectation of demand to remain muted in the majority of our key end markets throughout the remainder of the year.
Which will be added back to adjusted EBITDA for reporting purposes.
Of these costs, we expect approximately $2 million will be incurred in the second half of the year related to the acquisition.
As we previously mentioned our pro forma net leverage following the completion of the Acura Fab acquisition was approximately three one times.
Speaker #4: Sequentially, we expect the third quarter revenue to decline low single digits followed by a high single digit decline in the fourth quarter. Furthermore, embedded within our 2025 adjusted EBITDA guidance is the benefit of one to two million dollars of cost improvement driven by our MBX operational excellence and strategic value-based pricing initiatives net of inflationary pressures.
We intend to prioritize the repayment of debt with our available free cash flow currently targeting below two times by the end of 2026 lastly.
Lastly, I would like to expand upon James' comments regarding our fixed cost reduction initiatives and footprint optimization.
Earlier. This month, we began the process of consolidating three warehouses and one manufacturing facility and to our existing footprint.
Speaker #4: As it relates to free cash flow guidance, we expect our capital expenditures for the year will remain in the range of between 13 and 17 million dollars.
These actions will occur over the next six to 18 months aimed at rationalizing our asset capacity without compromising our workforce, while enhancing operational flexibility as volumes recover.
Speaker #4: Additionally, our free cash flow guidance includes 5 to 6 million dollars of non-recurring costs related to the CFO transition and the Accufab acquisition. Which will be added back to adjusted EBITDA for reporting purposes.
These four facilities are currently leased and we expect onetime cost between five and $7 million that will yield annual fixed cost savings of approximately $2 million.
Speaker #4: Of these costs, we expect approximately 2 million dollars will be incurred in the second half the year related to the acquisition. As we previously mentioned, our pro forma net leverage following the completion of the Accufab acquisition was approximately 3.1 times.
With that operator that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.
Thanks.
Speaker #4: We intend to prioritize the repayment of debt with our available free cash flow currently targeting below two times by the end of 2026. Lastly, I would ike to expand upon Jag's comments regarding our fixed cost reduction initiatives and footprint optimization.
So I'll ask a question. Please press star followed by one of your telephone keypad now.
If you change your mind fish Christophe followed by <unk>.
To answer your question. Please ensure device so on news with lately.
Our first question comes from Mark Smith.
Speaker #4: Earlier this month, we began the process of consolidating three warehouses and one manufacturing facility into our existing footprint. These actions will occur over the next six to 18 months aimed at rationalizing our asset capacity, without compromising our workforce, while enhancing operational flexibility as volumes recover.
<unk>.
From D a davidson.
Your line is open Mic. Please go ahead.
Okay. Good morning, Thanks for taking my questions here.
Good morning, Mike I.
I guess I'll start.
Good morning, let's start with <unk>.
Only been about a month ago on the rollover button now Jack.
So I can tell us a little about maybe have you gone through the facility topical to talk with customers a little more closely that you own it in the books closer to actually going on.
Speaker #4: These four facilities are currently leased and we expect one-time costs between five and seven million dollars that will yield annual fixed cost savings of approximately two million dollars.
How do you feel about the.
The lift ahead of you to integrate the company and then get them with some synergies Culturalize just your overall impressions of rocket that magic.
Speaker #4: With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.
Yes.
We were planning the close of the transaction, Mike We put together a playbook for a $30 60, and 180 day plan for integration.
Speaker #1: Thank you very much, achele. To ask a question, please press star followed by one on your telephone keypad now. If you change our mind, please press star followed by two.
<unk> integration activities are on track.
Speaker #1: When preparing to ask your question, please ensure your device is unmuted locally. Our first question. That's from Mike. Schlisky, from DA Davidson. Your line is open, Mike.
I have been to both the facilities multiple times since the announcement of the transaction.
And I have seen both the facilities already working on lean kaizen.
Speaker #1: Please go head.
Speaker #5: Good morning. Thank you for taking my questions here.
And value stream maps and already planning for operational efficiencies and trying to get more productivity all of these plans.
Speaker #1: Good morning, Mike.
Speaker #5: I guess I'll start. Good morning. Let's start with Accufab. It's been about a month. You've owned them a little over a month now. Jag, can you tell us a little about maybe have you gone through the facility, talked with folks, talked with customers a little more closely now that you own it, seen the books closer now that you own it?
I could not be more excited about <unk> had a sitting here.
This will be one of the most consequential.
M&A transactions the company would have done or last 80 year history.
Speaker #5: Kind of how do you el about the the the lift ahead of you to integrate the company and then get some get some synergies?
The opportunities commercially that are in front of us have been incredible.
Speaker #5: Culture-wise, just your your overall impressions of of Accufab manager that you own it.
We.
We as we're looking at not just getting more out of current active facilities. We're also continually talk and tell our customers <unk> customers on how they can leverage our existing Mac footprint.
Speaker #2: Yeah. As we were planning the close of the transaction, Mike, we put together a playbook for a 360, and 180-day plan for integration. All the integration activities are on track and I have been to both the facilities multiple times since the announcement of the transaction.
We talked about the commercial synergies or cross selling synergies just now the way we're thinking about accurate fab is that we could see active fiber revenues.
Speaker #2: And I've seen both the facilities already working on lean Kaizens and value stream maps and already planning for operational efficiencies and trying to get more productivity out of these plans.
To get to approximately 100 million by 2028.
And.
Cross selling synergies to exceed $20 million by 2028, so if we execute our plan as we laid out internally.
Speaker #2: I could not be more excited about Accufab sitting here. This will be one of the most consequential M&A transactions the company would have done or our last 80-year history.
This will be a home run for us and just the commercial opportunities.
That.
Our commercial team has been involved with you and I have been involved with with academic customers I've been really energizing and really exciting for us sitting here I could not be more excited.
Speaker #2: The opportunities commercially that are in front of us have been incredible. We as we're looking at not just getting more out of current Accufab facilities, we're also continually talking to our customers Accufab customers on how they can leverage our existing mech footprint.
Great great.
Thanks for that I also wanted to just touch on some of the end market outlook and some of the reasons why.
Outlook.
<unk> reduced a bit here.
As I go through some of the your customers' earnings calls the last few weeks and there are a few ago, including one or two big ones. The left with labor has gone out there so far.
Speaker #2: We talked about the commercial synergies across selling synergies just now. You know, the way we're inking about Accufab is that we could see Accufab revenues to get to approximately 100 million by 2028.
No one's really reduced the outlook all that much I mean, no one's bill certainly not positive.
I haven't seen any kind of major.
Downward.
Speaker #2: And cross-selling synergies to exceed 20 million by 2028. So if, you ow, we execute our plan as we laid out internally, this will be a home run for us.
Wondering jumping negative, but not that bad.
Wondering if you've got any thoughts if you can just give us some color as to how you came to conclusion that.
Things were kind of declining a bit here.
Is it coming from the Oems themselves is it coming from I guess, youre accurate, which forecast.
Speaker #2: And just a commercial opportunities that, you ow, our commercial team has been involved with, you ow, even I have been involved with with Accufab customers.
We're just kind of some of the basis and background as to how you came to this conclusion.
No.
Absolutely the biggest change in our outlook Mike is in the commercial vehicle market.
Speaker #2: I've been really energizing and really exciting for us. So we're sitting here. I could not be more excited.
When we started the year and what our guidance was based on was approximately 320000 trucks being produced in 2025.
Speaker #1: Great, great. Thanks for that. I also wanted to just touch on some of the end market outlook and some of the reasons why the outlook was was reduced a bit here.
And that is closely related to what ACB forecast loss at that time.
Speaker #1: You know, as I go through some of the your customers' earnings calls the last few eks, and there are a few to go, including one or two big ones still left, but whoever has gone out there so far, no one's really reduced their outlook all that much.
As you know today, the ACD forecast is down to 252000 units.
I recognize that many of our customers did not.
Speaker #1: I mean, no one's been all certainly not positive. I haven't seen any kind of major shift downward. So I'm kind of wondering, and it's definitely negative, but just not that bad.
Publicly indicate.
Their view of the softness in the marketplace, but at the same time, we have.
Speaker #1: I'm kind of wondering if ou've got any thought, if ou can just give us some thought as to how you came to the clusion that that things were kind of declining a bit here.
<unk> had numerous conversations with our customers.
We are seeing in the order trends not only in their bookings through monthly reports from ACP, but also our internal <unk>.
Speaker #1: Is it coming from the OEMs themselves? Is it coming from, I guess you have AccuSwitch forecasts? It's just kind of some of the basis and background as to how you came to this conclusion.
Feeds and our internal.
Demand that we're seeing from each of these customers. So let me give you a couple of examples in the month of July one of our largest CV customers.
Speaker #2: Absolutely. The biggest change in our outlook, Mike, is in the commercial vehicle market. When we started the year, and what our guidance was based on was approximately 320,000 trucks being produced in 2025.
<unk> out.
Approximately.
35% of their capacity through down days.
Speaker #2: And that is closely related to what ACT forecast was at that time. As you know, today, the ACT forecast is down to 252,000 units.
Similarly, another customer to call it about little over two weeks of production in July.
And then a third customer.
All of their Mexico facility took out all but two days of supply in the month of July they were essentially shut down the entire month of July.
Speaker #2: I recognize that many of our customers did not publicly indicate their view of this softness in the marketplace. But at the same time, we have had numerous conversations with our customers; we have seen the order trends not only in their bookings, through monthly reports from ACT, but also our internal EDI feeds and our internal demand that we're seeing from each of these customers.
And in August sitting here in the first week of August we're seeing a similar already within the first week. This top customer has taken out nine production days in the month of August and we expect them to take out more production days in the month of August Similarly.
If you look at last year. This one customer was producing in one of their facilities approximately hundred 70 trucks a day today.
Speaker #2: So let me give you a couple of amples. In the month of July, one of our largest CV customers took out approximately 35% of their capacity through down days.
In June of 225, they produced 138 trucks per day. So what the customers are really doing is that they're taking a significant number of production days and on top of that they are reducing their run rates in each of their plans. So that day is out.
Speaker #2: Similarly, another customer took out about a little over two weeks of production in July. And then a third customer out of their Mexico facility took out all but two days of supply in the month of July.
That equates to approximately 25% reduction in their capacity and in the run rate reduction equates to about 11% reduction in their capacity. So you do that math and look at the ACD forecast look at their bookings look at our Adi feed we don't have a choice but to adjust down.
Speaker #2: They were essentially shut down the entire month of July. And in August, sitting here in the first week August, we're seeing a similar already within the first two weeks this top customer has taken out nine production days in the month of August, and we expect them to take out more production days in the month of August.
Now.
The forecast for the CV market is 38% of our business. So in good faith I cannot sit here and then say that this market is going to be okay. But also recognize that many of these Oems have finance.
Speaker #2: Similarly, if you look at last year, this one customer was producing in one of their facilities approximately 170 trucks a day. Today, at least in June of 2025, they produce 138 trucks per day.
Armed they have spare parts businesses they have international.
Sales so they have other levers they could poll.
And perhaps that may be the reason why they didn't want to come off but certainly right that is not our expectation we feel really good about where we are in terms of our forecast for the year and given the uncertainty with tariffs.
Speaker #2: So, what the customers are really doing is that they're taking out a significant number of production days, and, on top of that, they're reducing their run rates in each of their plants.
Speaker #2: So the days out equates to approximately 25% reduction in their capacity, and then the run rate reduction equates to about 11% reduction in their capacity.
Given the uncertainty with freight and freight volumes and freight rates and more importantly.
27 regulations, we do not expect a pre buy in 2025, even though we're not providing guidance for 2026, we do not expect a pre buy in 2026 as well these.
Speaker #2: So you do that math, and look at the ACT forecast, look at their bookings, look at our EDI feed, we 't have a choice but to adjust down the forecast for the CV market.
All of these data points plus other macro headwinds really prompted us to take the actions on footprint consolidation that we announced today to take place right. So we're doing everything we can to control our future and we feel really good about how hard our.
Speaker #2: It's 38% of our business. So in good faith, I cannot sit here and then say that, you know, this market is going to be okay.
Speaker #2: But also recognize that many of these OEMs have finance arms, they have spare parts businesses, they have international sales. So they have other levers they could pull, and perhaps that may be the reason why they didn't want come off, but certainly, right, that is not our expectation.
<unk> team is working really proud of all the actions, we're taking and really positioning the business for better leverage better.
Profitability once the volumes recover.
Sorry that was a long answer.
Speaker #2: We feel really good about where we are in terms of our forecast for the year. And given the uncertainty with tariffs, given the uncertainty with freight and freight volumes and freight rates, and more importantly, you know, 2027 regulations, we do not expect a pre-buy in 2025.
No I really.
I appreciate that and I wouldn't mind, a little expression on it a little more answer.
Similar commentary on power sports construction accessing.
And.
Our the outlook. Similarly in the same boat or they are already down and kind of staying that way.
Yes, so they are a little bit better.
Speaker #2: Even though we're not providing guidance for 2026, we do not expect a pre-buy in 2026 as well. These all of these data points plus other macro headwinds really prompted us to take the actions on footprint consolidation that we announced today to take place, right?
Two one at a time.
Central.
Construction access we feel like we're seeing some level of increases in some product lines.
I believe that even though the infrastructure funding hasnt really started to flow to the states we feel good about.
Our access.
Speaker #2: So we're doing everything we can to control our future, and we feel really good about how hard our team is working, really proud of all the actions we're ing.
Revenues look like and also we feel pretty good about.
Some of the data center construction and work that's happening across the country, thus driving demand for construction equipment.
Speaker #2: And really positioning the business for better leverage, better profitability, once the volumes recover. Sorry, that was a long answer.
<unk> culture, I think were absolutely in the trough.
And we have had numerous conversations with our customers we feel like the recovery is probably 2026, perhaps even mid 2026, given the crop prices and the farmer income et cetera, but I don't expect agriculture market to deteriorate any further.
Speaker #1: No, I really appreciate that. And I wouldn't mind a little expansion on it a little more answer. And just give us some similar commentary on power sports, construction access, and ag.
And then last but not least power sports.
Speaker #1: Are the outlooks similarly in the same boat? Or were they already down and kind of staying that way?
It looks like the power sports Oems have stabilized.
Speaker #2: Yeah. So they're a little bit better. Let me get to one at a time.
Their inventories in their channels, even though they have a little bit of work to do they have a pleased aligned their consumer demand with their production volumes. So thats really good news and Ags already many of the customers have done that so there is there is no more channel inventory to be drawn down in agriculture, our construction market.
Speaker #1: Thank you.
Speaker #2: Okay. Construction access, we feel like we're seeing some level of increases in some product lines. I believe that though the infrastructure funding hasn't really started to flow to the states, we feel good about where our access revenues look like.
<unk>.
So those three markets, we feel pretty good a little bit of a rate cut later this year could spark a power sports recovery.
Speaker #2: And also, we feel pretty good about some of the data center construction work that's happening across the country that's driving demand for construction equipment.
As we talk about construction and agriculture, we do expect that to be stable for construction and agriculture for a recovery next year.
Speaker #2: Agriculture, I think we're absolutely in the trough. And we have had numerous conversations with our customers. We feel like the recovery is probably 2026, perhaps even mid-2026.
Okay.
Thanks, very much I'll give others, a chance I will pass it along thank you.
Speaker #2: Given the crop prices and the farmer's income, etc., but I don't expect agriculture market to deteriorate any further. And then last but not least, power sports, you know, it looks like the power sports OEMs have stabilized their inventories in their channels.
Thank you.
Our next question comes from <unk> <unk> from William Blair.
Line is open Ross. Please go ahead.
Hey, good morning, guys.
Good morning Ross.
Okay.
Can you guys called out SKU rationalization at least within power sports.
Speaker #2: Even though they have a little bit of work to do, they have at least aligned their consumer demand with their production volumes. So that's really good news.
And it looks like just maybe $60 million organic decline in the guide for the second half.
Speaker #2: And ag, as you know already, many of the customers have done that. So there's no more channel inventory to be drawn down in agriculture or construction markets.
Can you maybe just help us size.
What would be potential SKU rationalization that might not come back versus just normal cyclicality.
I am not aware of that Ross on that comment and let us come back to you, but let me just generally address.
I think one of our customers.
Might have introduced a brand new product in power sports.
A low lower price.
Side by side.
And they might be working on.
Some.
The product line rationalization, but we're not aware of anything specific but.
But we're happy to get back to you on that.
Okay.
It was mentioned in the deck.
K the press release, so I'm just wondering.
And then just kind of think about destocking. It sounds like you guys have confidence that you have been destocking or you have been building below your customers restocking rates the last couple of years or quarters.
That is we absorbed probably a $100 million over again organic decline.
So.
Just trying to get a sense of where the bottom is because I can appreciate tariff uncertainty.
And I don't have enough historical context to see how quickly this could turn on a dime net new.
Customers come back tomorrow, and demand picks up where the rates are.
Beautiful bill or whatever.
Yes.
Good question Ross in construction Agriculture, I believe the challenge inventories have been drawn down and that the end user demand is aligned with the current production rates for our customers and power spores there might be a little bit of work left but I would say.
Less than a quarter's worth of work left for our customers to completely align with the end market demand in power sports, we're already seeing some green shoots.
Sure a couple of our customers in power sports. So our expectation is that even a small decrease.
Maybe even a 50 bps by end of this year and interest rate cuts could help the power sports market going into next year.
Okay.
And then just one last one for me.
Margin cadence for the second half you guys had good decrementals around 19% tracking toward your kind of 17% threshold of mdx, but the guide at the midpoint seems to imply a 35% decline.
I don't think this business has that are produced a 35% decremental. So maybe just some moving parts.
I think that mdx and volume coming in.
Sure certainly volume absolutely plays a significant part on that and we haven't seen this level of volumes or decline in volumes in a while so as that plays through we are seeing that degradation happen on our decrementals, but we do see that they will return as we look ahead into the future.
Okay.
Yes.
Our next question, Thanks, Ross from Jackson Northland Securities.
Your line is open. Please go ahead.
Thanks.
The topics I wanted to dig into.
Dug into but let's circle back to a commercial vehicles I mean.
<unk>.
The Trump administration is really throw the whole industry a curve ball.
And.
It's going to take a while for it to dig out.
Is there.
A chance that we would be able to see.
Dealer inventories within commercial vehicle normalized in 2026.
And if you think that's the case how long do you think it would take for that to happen. So I guess, what I'm getting around us.
To your.
Commercial vehicle customers.
Thank you for that market.
How bad is the with.
With dealer inventory levels.
The current view in terms of.
The timeline and will take what can normalize. This question assumes that we'd see a rebound in 2000.
So that's my first question.
Yes, good question Ted.
Our.
CV customers are are frantically working to align there.
Channel inventories.
With end user demand.
One of our customers in their public comments mentioned that.
Even though they're there or channel inventory numbers look like they're high but a lot of that inventory is actually sitting at the bodybuilders.
That gives me comfort that.
They can quickly aligned.
Their production rates to end user demand.
Particularly as I mentioned all of their production base that theyre, taking out in their factories. So thats the intention to quickly align.
So I suspect by end of this year right. Many of our CV customers will get their production aligned with end user demand the bigger question for for us.
Is is there going to be a pre buy in 2026.
I already called out there will not be in 2025.
So.
It remains to be seen what the EPA regulations in 2007 will do.
So we will have to watch that I don't have a prediction for 2006, our internal assumption is that there will not be a 2026 fee buy but if there is a pre buy in 2026 that will be an upside for us.
Okay.
So your current view, though would be that commercial.
Vehicle channel inventory by the time, we enter 2026.
Will be roughly aligned with.
With market demand.
That would mean that we will have.
Conceptually a soft stock performance.
Commercial vehicle and then the.
The lack of a better term or some kind of rebound.
26, assuming.
Plays out as you said that doesn't involve any kind of.
Okay.
A pre buy it just means that they will.
Start producing.
Two.
End market demand.
Eagle Ford maybe go back to kind of what you were seeing in the first time.
Or something.
Yes.
But it's just a scenario.
That is correct.
We.
We're forecasting no recovery in the second half for the CV market.
Okay.
Okay.
Next question, just kind of as we're growing around the different verticals.
Was actually.
Little surprised with the revisions to military and other in the second half.
Kind of wanted.
A little more color into what caused the shift to the outlook for both of those businesses.
Businesses.
Hum.
I think there's just a lapping up some of the programs and.
Other than that Theres, nothing major for us to call out in the military segment or the other segment other segment as we pulled out we will be pulling out.
Some of the data center in critical power revenue sort of the other market and then putting them into the newly called out critical power and data center end market.
Let me add to the other markets.
Some of that is just basically a re categorization.
It was kind of pick up.
It surprised me a little bit.
That actually makes completely understood.
On the other market.
Gently.
Predominantly MSA pad.
We are seeing as we called out almost 8% growth in the first half of this year significant portion of that is coming through due to the tariffs.
Aluminum fabrications in extrusion to lot of our customers and new customers.
Redirecting some of their buys from outside the U S to the U S and we have been a beneficiary of that redirect on particularly aluminum applications.
So.
Okay.
That's it for me thanks for taking my questions.
Thanks, Dan.
As a reminder, Sparks a question. Please press star followed by one on the telephone keypad now.
Our next question comes from Palio Bank.
Sorry from Citigroup. Your line is open. Please go ahead.
Good morning.
Good morning <unk>.
Okay.
So first of all ask given your emphasis on the re shoring of domestic footprint, 92% material sourcing are there any upcoming contracts or OEM relationships gain resorts from competitors or anything you can disclose or comment on.
Obviously, we will not publicly comment on any of our customer contracts.
But as I, just mentioned and Italia, we are seeing a good amount of.
Inflow.
For both steel and aluminum fabrications that.
Are primarily driven by tariffs at the same time, many of our aluminum fabrications customers.
Given.
A.
A shorter or rather narrow social supply from aluminum fabrications are.
Going to pull the trigger and make decisions on reassuring aluminum fabrications to the U S. And now we are seeing a significant uptick in request for quotations and also new business at our MSA.
Operation at the same time, even though we have been extremely busy answering customers request for quotations in our steel fabrication business. Many of our customers are still waiting to make their decisions given the continuous change in tariff structures a lot of our customers get their.
From India, a lot of the customers get their products from Vietnam, Thailand, and China and many of other Asian locations as the tariff picture continues to be a murky.
Though we have provided a lot of the information cost information to our customers and price information to our customers. We have not seen many of them make decisions on steel side of our business.
Super Helpful. And then I know you mentioned Youll start reporting critical power and data center.
<unk> contribution.
Other initiatives are you doing to diversify more meaningfully or I guess long term exposure.
All your verticals are you diversifying more meaningfully toward data centers or military defense I actually think long term what is like Max.
The strategy or approach to the verticals, how should we think about absolutely yes.
Yes.
<unk> gives us a great opportunity to go explore.
The significant growth in critical power and data center end markets and we'll talk about that at length.
But let me also give you another picture.
In the regular or rather base mass business. We mentioned that we're ahead of our $100 million new business wins for the year.
We ended June.
At a little over $60 million of new business wins.
For our legacy <unk> business at the same time our pipeline.
Just what we're working on is over $280 million of strategic opportunities for the base business that gives you a picture of.
How much opportunity that is in front of us that we're actively working at the same time.
A significant number of new wins came from either new customers or completely new divisions within our existing customer base. So our sales team is highly focused on diversifying out of our legacy end markets we have.
A lot of business development opportunities that are ongoing that will help us get into more.
A&D Aerospace and defense medical and the data center and critical power applications.
How does that makes sense and then one last question on my end.
The presentation showed solid backlog of military how sustainable is that backlog and what proportion is reoccurring aftermarket service fresh new programs any color would be helpful.
Most of our programs will be recurring programs.
I think there will be some.
The aftermarket generally we say that approximately 5% of our total revenues are in the aftermarket space.
But for the military programs, we're primarily on Jay LTV, FM, TV <unk> and <unk> platforms. Those are our three large <unk>.
Ramps that we're on with both.
I guess I won't name the customers here right you can guess, who they are so those two customers account for a majority of our defense sales of those programs continue to progress given the conflicts around the world and the and continuing.
Re <unk>.
Stocking of U S inventories so we're.
We're confident that those programs will continue forward.
That's all on my end thank you.
Thank you.
We currently have no further questions. So I'm not talking about the Jaguar ready some closing remarks.
Once again, thank you for joining our call. We appreciate your continued support for <unk> 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 you may now disconnect.
Yeah.
Thank you for joining today's call you may now disconnect your lines.
[music].
Yeah.