Yahoo Finance Mayville Engineering Company, Inc. (NYSE:MEC) Q1 2024 Earnings Call Transcript
Mayville Engineering Company, Inc. (NYSE:MEC) Q1 2024 Earnings Call Transcript May 10, 2024
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Operator: Good morning, everyone and welcome to the Mayville Engineering Company First Quarter 2024 Earnings Conference Call. My name is Tash, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for question-and-answers at the end. I'd now like to pass the conference over to your host, Stefan Neely, to begin. Stefan, please go ahead.
Stefan Neely: Thank you, operator. On behalf of our entire team, I'd like to welcome you to our first quarter 2024 results conference call. Leading the call today is MEC's President and CEO, Jag Reddy; and Todd Butz, Chief Financial Officer. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures.
Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.
Jag A. Reddy: Thank you, Stefan, and good morning, everyone. Thank you for joining us today. The first quarter was a strong start to the year for our team, one highlighted by a robust net sales growth, margin expansion, and free cash flow generation. Our first quarter results continue to reflect the success of our MBX framework and the impact of our culture of continuous improvement. Demand within our end markets remains healthy, supporting organic sales growth, while our teams execute on new project startups in our commercial vehicle, Powersports, and other end markets. Over the last year, our team has demonstrated measurable progress with sourcing optimization and our labor utilization, resulting in $1.6 million of year-over-year self-help adjusted EBITDA improvement during the first quarter alone.
We continue to see significant opportunities to further increase plant utilization, while driving improved operating leverage. For example, at our Hazel Park facility, we expect to achieve a $100 million annual revenue run rate by year-end 2024, consistent with our prior expectations. Looking to the remainder of 2024, I am encouraged by the opportunities we see to further improve our commercial reach and operational productivity. However, given broader market volatility, we continue to manage our business with discipline and conservatism. Through this lens of cautious optimism, we anticipate a steady, ratable cadence of growth and margin improvement through the balance of the year, all of which reflects the expected timing of new project starts, together with pockets of demand softness in select end markets.
With that in mind, we are reiterating our 2024 financial guidance, which projects full year net sales growth of between 5% and 9%, and growth in total free cash flow of between approximately $11 million to $21 million when compared to 2023. Turning now to a review of market conditions across our five primary end markets. Let's begin with our commercial vehicle market, which represents approximately 37% of our trailing 12-month revenues. During the first quarter, commercial vehicle revenue decreased by 0.3% on a year-over-year basis. This is primarily due to softening end market demand. As ACT Research reported, North American Class 8 production fell 1.9% year-over-year in the first quarter. Our performance during the quarter reflects softening overall demand on weaker freight markets, as well as general slowing in the academic activity.
However, this was offset by new project launches, which we expect will be a tailwind for MEC through the rest of this year. Currently, ACT Research forecasts the Class 8 vehicle production to decrease 10.4% year-over-year in 2024 to 305,000 units. ACT expects build rate declines of nearly 10% during the second quarter and falling to over 15% during the second half of the year. For MEC, we expect our new CV project launches to continue ramping into the middle of this year, which will help us maintain comparable sales to this end market relative to 2023. It is also worth highlighting that ACT currently expects Class 8 production to recover in 2025, growing 5.1% compared to 2024 with continued growth of 8.1% from 2025 to 2026, which supports our organic growth expectations over the next two years.
Next is the construction and access market, which represented approximately 18% of our trailing 12-month revenues. Construction and access revenues increased 7.3% on a year-over-year basis in the first quarter. This reflects the steady demand in nonresidential and public infrastructure markets, which more than offset softness within residential markets. We expect this trend to continue through 2024, supporting our overall outlook for flat net sales to this end market, supported by the demand from infrastructure-related projects and new customer wins. The Powersports market represented approximately 17% of our trailing 12-month revenues and increased by 25.7% on a year-over-year basis in the first quarter. We continue to benefit from market share gains, which include new customer programs on high-end models and were modestly offset by a cooling in customer discretionary spending.
We continue to expect growth in net sales to this end market to moderate somewhat through the year, but still remain positive compared to 2023 due to the momentum from market share gains. Our agricultural market represented approximately 10% of trailing 12-month revenues and increased 3.5% on a year-over-year basis during the first quarter. Our first quarter results for this end market reflect market share growth and contributions from the MSA acquisition, offset by softening demand within large Ag and turf markets. As we move through the year, we expect that new project wins will continue to firm up any potential softness in this end market. As you will recall, we acquired Mid-States Aluminum at the beginning of the third quarter of 2023. And as of the beginning of the current year, MSA has been fully integrated into the MEC platform.
During the first quarter, revenues associated with MSA drove 9.8% of our top-line growth year-over-year, with the majority of these revenues being in our other end market. For 2024 as a whole, we continue to see MSA generating between $20 million to $30 million of incremental net sales, with revenue synergies beginning to ramp up in the second half of the year. On the commercial front, our sales team continues to have success cross-selling MSA's capabilities. We have earned multiple supplier quotes from legacy MEC customers and our quote pipeline continues to grow with multiple strategic projects being negotiated. On the pricing front, our commercial team has been working tirelessly over the last year to implement our programmatic value-based pricing model.
During the first quarter, we continue to see the fruits of these efforts as commercial pricing initiatives, net of inflationary pressures yielded $0.8 million in year-over-year adjusted EBITDA growth. Particularly as new project volumes come online, we expect to see continued margin expansion from our pricing initiatives through the rest of the year. A few substantial new wins during the first quarter include the following. We were able to win significant content with one of our top military customers for the JLTV product line, expecting incremental growth during the program transition between OEMs. During the first quarter, we continue to expand share with one of our key Powersports customers supporting their next-generation product lines, as well as expansion into some of their other product offerings.
These wins support additional growth over the next two years and expect further organic and cross-selling opportunities in the quarters ahead. In the quarter, we expanded share within our primary EV customer related to battery thermal management products, which continues to be driven by our available capacity at Hazel Park. During the quarter, we received significant awards for engine tube products with multiple customers, driven by expected regulatory emissions changes that will be occurring in the years ahead. We have continued to gain additional market share as our commercial vehicle customers plan for their vehicle updates, both our next-generation products, and battery electric vehicle platforms. We expect to continue to grow share over the next two years with the amount of change that will occur in this industry.
As I mentioned earlier, our operations team has been very focused on sourcing optimization, improving labor utilization, and improving overall inventory efficiency. These initiatives have been driven by our rigorous approach to MBX lean implementation highlighted by over 150 MBX kaizen events since launching the MBX program in late 2022. In summary, the execution of our commercial and operational excellence initiatives remain on track, and we are confident in our ability to recognize near and long-term benefits from these various self-help initiatives. Recall that by the year end 2026, we expect to deliver between $750 million and $850 million in revenues, expand adjusted EBITDA margins to between 14% and 16%, and generate free cash flow of between $65 million and $75 million.
Given our strong strategic execution on the current multi-year demand outlook, we remain confident in our ability to achieve these targets. In terms of capital allocation, we remain very focused on aggressively reducing our outstanding borrowings to achieve our previously stated goal of a net leverage ratio of between 1.5 times and 2 times by the end of 2024. Given the strong free cash flow generation during the first quarter, we were able to reduce our net leverage to 1.98 times. Going forward in the year, we remain committed to continued debt repayment with free cash flow generation as our top priority for capital deployment. In addition, we are also continuing to evaluate opportunistic share repurchases under our existing $25 million authorization.
Strategic M&A remains a key part of our multi-year growth and business transformation strategy as we look to expand our capabilities to meet the rapidly growing demand for lightweight materials fabrication. As we are able to achieve our targeted net leverage levels, we will be selective in pursuing accretive M&A that continues to build on our market-leading capabilities and positions the company to further capitalize on multi-year secular growth trends in energy transition and OEM outsourcing. In summary, I am very proud of our team's ongoing commitment to excellence and strategic execution. We have come a long way as an organization over the last 18 months. I continue to expect that our execution positions as well for ratable growth for the remainder of 2024 and above market growth as we move through the cycle.
With that, I will now turn the call over to Todd to review our financial results.
Todd M. Butz: Thank you, Jag. I'll begin my prepared remarks with an overview of our first quarter financial performance, followed by an update on our balance sheet and liquidity. Total sales for the first quarter increased 13.1% on a year-over-year basis to $161.3 million. This increase was driven by a combination of the MSA acquisition and improved organic sales volumes, partially offset by expected softening demand in our legacy agriculture end market and the expected falloff of certain military aftermarket programs at the end of 2023. When excluding the MSA acquisition, organic net sales growth was 3.3% on a year-over-year basis. Our manufacturing margin was $20.9 million in the first quarter as compared to $16.4 million in the same prior year period.
The increase was primarily driven by increased organic volumes, MBX, commercial pricing initiatives, and the acquisition of MSA. Our manufacturing margin rate was 13% for the first quarter of 2024 as compared to 11.5% for the prior year period for an increase of 150 basis points. Other selling, general, and administrative expenses were $7.8 million for the first quarter of 2024 as compared to $7 million for the same prior year period. The increase was primarily driven by an additional $0.3 million of legal expenses related to our former fitness customer, incremental costs related to the acquisition of MSA, increased costs related to compliance requirements, and annual wage inflation. Interest expense was $3.4 million for the first quarter of 2024 as compared to $1.7 million in the prior year period due to higher interest rates and higher borrowings under our credit facility.
The increase in borrowings is due to the acquisition of MSA, which closed on July 1st, 2023. We continue to expect debt reduction during 2024, which may provide for further interest rate step downs as we achieve our net leverage goal of between 1.5 to 2 times by year end. Adjusted EBITDA increased to $18.5 million versus $13.8 million for the same prior year period. Adjusted EBITDA margin percent increased by 180 basis points to 11.5% in the current quarter as compared to 9.7% for the same prior year period. The increase in our adjusted EBITDA margin was primarily due to the increased organic volumes, the MSA acquisition, MBX initiatives, and the benefit from our commercial pricing activities. Our first quarter results demonstrate the continued progress towards our 2026 adjusted EBITDA margin goal of 14% to 16%.
Turning now to our statement of cash flows and the balance sheet. Free cash flow during the first quarter of 2024 was a positive $7.9 million as compared to a negative $8.5 million in the prior year period. The improvement in free cash flow year-over-year was primarily due to the $14.3 million increase in cash from net working capital. The progress of our MBX program can be seen in many parts of our financial statements. On a year-over-year basis, direct MBX savings generated 100 basis points of manufacturing margin improvement, and the team's lean focus has improved our working capital free cash flow by $14.3 million, and has allowed us to increase the capacity and utilization of existing assets. Please note that we continue to expect our full year MBX savings to be between $2 million and $4 million as the year-over-year comparisons moderate throughout the year.
As of the end of the first quarter of 2024, our net debt, which includes bank debt, financing agreements, finance lease obligations, and cash and cash equivalents, was $142.8 million as compared to $83.7 million at the end of the first quarter of 2023, and resulted in a net leverage ratio of 1.98 times as of March 31st. In light of our first quarter result and our current outlook for the rest of the year, we are reiterating our financial guidance for the full year 2024. For 2024, we continue to expect the following: net sales of between $620 million and $640 million, adjusted EBITDA of between $72 million and $76 million, free cash flow of between $35 million and $45 million. The assumptions behind our risk-adjusted guidance for the year are also unchanged and reflect organic growth of between 1.5% and 2.5% due to the new project launches, including the ramp-up of Hazel Park, offset by expected end-of-life projects, and slowing of macroeconomic demand in a few of our end markets.
With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question-and-answer session.
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