Mayville Engineering Company, Inc. (MEC) Earnings Call Transcript & Summary

Good afternoon. I'm Bob Kamphuis, Chairman of the Board, President and Chief Executive Officer of Mayville Engineering Company, Inc. And on behalf of our company, I want to welcome you to our 2020 Annual Meeting of the Shareholders, our first annual meeting as a publicly traded company. As you know, we are holding the annual meeting online due to an abundance of caution related to the coronavirus and the priority we place on the health and well-being of our shareholders, our employees and other stakeholders. We have worked to offer the same participation opportunities as would be provided at an in-person annual meeting, and we are pleased to have each of you in attendance virtually. In keeping with the virtual approach to this year's meeting, it is now 2:00 p.m. Central time on May 12, 2020, and I call the meeting to order. If you have not voted yet, please do so now as we will close the polls in a few minutes. You may vote by clicking on the Voting button on the web portal and following the instructions there. Our first action in the general order of business today will be to act upon the business of the meeting. We will then receive a report about the voting results. And after that, we'll offer some comments about the company's performance in 2019 and looking forward in 2020. During the final portion of the meeting, we will be glad to answer any questions you may have about Mayville Engineering Company, or MEC. Before we begin the business portion of this meeting, I'd like to introduce several individuals who play key parts at MEC. First, I'd like to introduce the other directors of the company in addition to myself, Allen J. Carlson, Retired Chief Executive Officer of Sun Hydraulics, and currently employed by the University of Florida's College of Engineering; Timothy L. Christen, Retired Chairman and Chief Executive Officer of Baker Tilly Virchow Krause, LLP, and currently the Nonexecutive Chairman of Baker Tilly International Limited; Steven L. Fisher, Retired President, Vice President and Division Chief Financial Officer of Caterpillar, Inc; Craig E. Johnson, Retired Business Executive and Risk Management and Insurance Consultant; Patrick D. Michels, President and Chief Executive Officer of Michels Corporation; Jay O. Rothman, Chairman and Chief Executive Officer of Foley & Lardner LLP. I'd also like to take a moment to thank retiring Board members, John C. Peter, for his 13 years of service as a Board member of Mayville Engineering Company and wish him well in the years ahead. Thanks, John. Next, I'd like to introduce the other executive officers of the company in addition to myself, Todd Butz, our Chief Financial Officer; Ryan Raber, our Executive Vice President, Strategy, Sales and Marketing; Rand Stille, our Chief Operating Officer; and Eric Welak, our Executive Vice President, Fabrication operations. It is now 2:04 p.m. Central time and since everyone has now had the chance to vote, I hereby declare that the polls are closed. Please note that this meeting is being recorded. However, no one attending via the webcast is permitted to use any audio recording device. Serving as Inspector of Elections for today's meeting is Russ Ryba, a partner in Foley & Lardner LLP. Let me ask Russ whether proper notice was given for this meeting and whether a quorum is present. Russ?

Thank you, Bob. I have a lot professional of shareholders entitled to vote at this meeting and an affidavit of service of the notice of meeting, certifying that notice of the meeting, the proxy statement and the annual report were properly mailed to those shareholders. This shareholder list is available for inspection by any shareholder of MEC on the website for this virtual meeting as set forth in the notice of the meeting. And you can use your control number to access that shareholder list. With respect to the termination of the quorum, the present in person, virtually or by proxy, approximately 97% of the total number of shares of stock entitled to be cast on the March 9, 2020, record date for this meeting. That constitutes a quorum on the bylaws of Mayville Engineering Company.

Thank you, Russ. Since a quorum is present, this meeting will therefore proceed. The first item of business is the election of 2 directors: Steven L. Fisher, and Patrick D. Michels are nominated as directors to serve until the 2023 Annual Meeting of Shareholders and until their successors are duly elected and qualified. The second and final item of business is the ratification of the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020. Let me now ask Russ, The Inspector, for a report on the votes. Russ?

Thank you. On the election of Steven Fisher and Patrick Michels to serve as directors of the company until 2023 Annual Meeting of Shareholders and until their successors are duly elected and qualified, each of them has received overall plurality of the votes cast at this annual meeting. On the ratification of the appointment of Deloitte & Touche as the company's independent registered public accounting firm for 2020, the proposal received the vast majority of the votes of the shares of common stock represented and voted at this annual meeting.

Thank you, Russ. Based on the voting, number one, the director nominees have each been properly elected. And number two, the shareholders have ratified the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020. I hereby direct the results of the voting to be incorporated into the minutes of this meeting. That completes our official business agenda for today. Consequently, I declare the business portion of the meeting adjourned. I would now like to provide comments regarding 2019 highlights, and our business and activities. There are two themes that I would like you to take away from this meeting. The first theme is that MEC is the best positioned fabricator in the country today to weather the economic downturn we are facing because of the COVID-19 pandemic. We have a strong balance sheet, a diversified and market-leading customer base, a cost-effective and highly automated and redeployable manufacturing capability and logistically beneficial locations, along with an aligned and motivated workforce. We remain bullish on the long-term future and have a realistic view of the near-term challenges. MEC was founded on and continues to focus on 4 important factors: quality, cost, speed and outstanding customer service. We demand of ourselves that we are the highest quality, most cost-efficient and most agile fabricator in the markets we serve, and we are always looking for ways to add value to our customer relationships. MEC is investing into this unprecedented business cycle, so we will emerge even stronger and even more agile. We believe we have the resources, scale and disciplined capital allocation that will allow us to succeed over the long term. Our dedicated workforce will find ways to provide our customers with innovative solutions. The second theme is one I've emphasized throughout my tenure at MEC, we make things simple for our customers. It is one model that truly drives every decision, every investment and every initiative we undertake. In short, it's why we are the largest, and, we believe, the most successful fabricator in the country. We partner with our blue-chip company customers, providing a simple and proven cost-effective solution through our scale and agility that they cannot create on their own. We're a seamless partner that supports their mission and their success. We make things simple. By any measure, 2019 was a monumental year for MEC. At the beginning of the year, we focused on the integration of Defiance Metal Products, or DMP, which we acquired in December of 2018. DMP further diversified and strengthened our position in the commercial vehicle and construction equipment markets, adding facilities and new logistically advantaged geographies. It has a bright future as an integral part of our organization. The biggest event of 2019, though, is the reason we're here today, our initial public offering. While it remains a great source of pride that MEC has been an employee-owned company for decades, a change was needed. In recent years, as we continued our strong growth, it became apparent that the existing employee stock ownership plan, or ESOP, structure, the company was hindering our ongoing growth by creating a growing financial obligation. After reviewing various alternatives, the decision was made to take the company public, expanding our ownership structure and providing a market for our shares, while maintaining our majority employee ownership. On May 9, 2019, MEC began trading on the New York Stock Exchange. Having a public marker for MEC ESOP shares provides us with more free cash flow to execute our growth strategy. Over time, it will also allow us to enhance our competitive position; invest in new flexible, redeployable automation; and acquire other companies that will further diversify our customer and market mix. This virtuous cycle should, in turn, help our cash flow grow as we continue to diversify our markets and customers served. Following the IPO in late in last year's third quarter, our results of operations were adversely impacted due to the rapid shift in demand in many of the end markets we serve, which led to near-term production schedule changes for many of our key customers. While the current stock price is not where we'd like it to be, I know that like many of our other employee shareholders, I am focused on the long-term value of the company and firmly believe that value will be realized over time. The flexibility and resources we have to grow our business, even in this difficult market environment, will ensure MEC continues to thrive. As we look ahead, we will build on our history of prudently deploying capital to invest in the future in 3 primary areas. First, organic growth. We believe there are significant additional opportunities to serve more of our existing customers' needs and to win new customers with our strong one-stop-shop offering. We believe outsourcing trends will continue to grow, and MEC will be able to shift between markets, establishing revenue streams and attractive, adjacent or complementary platforms through our new product extensions. Second, processing capital-driven improvement initiatives. Driven by our workforce's evolving talents and a keen eye to value creation, our improvement initiatives have resulted in significant cost savings. This prong of our strategy will continue to include smart investments in flexible redeployable automation, coupled with continuous improvement activities. And third, acquisitions. We will continue to identify and will opportunistically execute on logistical, logical, strategic acquisitions that will allow MEC to extend its market-leading position. Our reputation, scale and track record of performance make us the consolidator of choice in the acquisition world. I am pleased with our accomplishments in 2019, the IPO, the integration of DMP, the deleveraging of the company and a revised credit agreement, to name a few. I'd like to thank all of our employees for their continued dedication and their belief in our company. 2019 certainly was a milestone year for MEC. 2020 is certainly bringing significant challenges to the entire world. However, I remain optimistic about the future. Our people, strategy, investment in flexible automation, market presence and position as the leading and largest fabricator in the United States will allow us to mitigate challenges and take advantage of opportunities. We have successfully managed through many different cycles over the years, and we will do so, again, this year. I'm surrounded by a strong, experienced Board of Directors and a tremendous management team, whom I earlier introduced, with employee shareholders who know this industry and our potential better than anyone else. 2020 is our 75th year as a company, and I know that our entire team will work tirelessly to build upon our long-term success in this year and beyond. Todd Butz, our Chief Financial Officer, will now briefly review our 2019 financial performance. Todd?

Thank you, Bob. 2019 was definitely a transformational year for MEC. We completed our IPO in May that generated $102 million of net proceeds, which were used to substantially reduce our debt position from approximately $188 million pre-IPO to approximately $72 million at the end of 2019. We also successfully completed the integration of Defiance Metal Products, or DMP, which was acquired in late December of 2018. We finished the year with record net sales of $520 million as compared to $355 million in 2018, an increase of $165 million or 46.5%, driven by organic sales growth and the DMP acquisition. Net loss for the full year 2019 was $4.8 million due to the $28 million of onetime charges related to the DMP acquisition and the IPO. We also delivered record adjusted EBITDA of $53 million as compared to $44 million in 2018, an increase of $9 million or 20.5%. Capital expenditures for 2019 totaled $26 million, which focused on our continued investment in new technologies and automation and positions us well to meet future customer demand. In September of 2019, we entered into an amended and restated credit agreement that provides ample credit capacity through a $200 million revolver and an accordion feature allowing for an additional $1 million of borrowing capacity for a total of $300 million, while at the same time, lowering our interest rates. We ended 2019 with $72 million of debt and an adjusted EBITDA-to-debt ratio of only 1.4x. Turning to 2020, we ended the first quarter of 2020 with net sales of $108.6 million as compared to $143.7 million for the first quarter of 2019, a decrease of approximately 24%. The decline was driven by the continued impact of market demand changes, most notably in the commercial vehicle, agricultural and construction end markets as well as the COVID-19 impact in late March. We delivered adjusted EBITDA of $11.4 million as compared to $16.8 million in the same prior year period. We finished the quarter with a strong balance sheet and low debt leverage of 1.6x adjusted EBITDA, so we are well positioned to navigate through the COVID-19 pandemic.

Thank you, Todd. Now we'll be glad to address any questions you may have about MEC. Representatives of Deloitte & Touche, our independent registered public accounting firm, are also available to respond to appropriate questions you may have. [Operator Instructions] Not seeing any. I won't ask for questions for long. But thank you for attending our virtual 2020 annual meeting. We appreciate your interest in MEC, and please, everybody, be safe and healthy, and appreciate your interest in our company. Thank you.

Ladies and gentlemen, thank you for joining. This concludes your call. You may now disconnect.