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

[Audio Gap] Robert 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 2021 Annual Meeting of Shareholders. As you know, we are holding the annual meeting online due to the ongoing pandemic and the priority we continue to place on the health and well-being of our shareholders, employees and stakeholders. We have worked to offer the same participation opportunities as would be provided at an in-person annual meeting, and we're pleased to have each of you in attendance virtually. In keeping with the virtual approach to this year's meeting, it's now 2:00 p.m. Central Time on April 20, 2021, 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, I'll offer some comments about the company's performance in 2020 and business highlights. During the final portion of the meeting, We'll be glad to answer any questions you may have about Mayville Engineering Company, or MEC. Before we begin the business portion of the meeting, I'd like to introduce several individuals. 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 Corporation, 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 Vice President and Division Chief Financial Officer of Caterpillar, Inc; Jennifer J. Kent Executive Vice President of Administration, General Counsel and Secretary at Quad/Graphics; 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 member, Craig E. Johnson, for his 14 years of service as a Board member of the Mayville Engineering Company, and wish him well in the years ahead. 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; and Rand Stille, our Chief Operating Officer. It's now 2:04 p.m. Central Time. And since everyone has now had the chance to vote, I hereby declare 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, our partner at Foley & Lardner LLP. Let me ask Russ whether notice was given for this meeting and whether a quorum is present.

Thank you. I have live possession and list of shareholders entitled to vote at this meeting as well as an affidavit of the service of the meeting of the notice -- notice of the meeting certifying that the notice of the meeting, the proxy statement and the annual report were properly mailed to those shareholders. The 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 by using your control number found on your proxy card. With respect to the determination of a quorum, there are present in this meeting, in person, virtually or by proxy, approximately 97.3% of the total number of shares of common stock entitled to be cast as of February 22, 2021, the record date for this meeting. This constitutes a quorum under the bylaws of Mayville Engineering Company.

Thank you, Russ. Since a quorum is present, this meeting is therefore able to proceed. The first item of business is the election of 3 Directors. Allen J. Carlson, Timothy L. Christen and Jennifer J. Kent are nominated as directors to serve until the 2024 Annual Meeting of Shareholders, and until their successors are duly elected and qualified. The second item of business is the approval of the amendment to the Mayville Engineering Company, Inc. 2019 Omnibus Plan. The third 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 2021. Let me now ask Russ, the inspector, for a report on the votes. Russ?

Thank you, Bob. On the election of Allen Carlson, Tim Christen and Jennifer Kent to serve as Directors of the company until the 2024 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 amendment to the Mayville Engineering Company in 2019 Omnibus Plan, the proposal received well over a majority of the votes of the shares of common stock represented and voted at this meeting. Finally, on the ratification of the appointment of Deloitte & Touche as the company's independent registered public accounting firm for 2021. 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 been properly elected; number two, the amendment to the 2019 Omnibus Incentive Plan has been approved; and number three, the shareholders have ratified the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2021. 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 2020 highlights and our business and activities. Of course, 2020 was a year unlike any in our lifetimes. I'm very pleased with the way that MEC responded to the challenges we faced. We were steadfastly dedicated to the health and safety of our employees. We did this by adhering to our core strengths: agility, adaptability and realignment at all times. Not only did we effectively adapt our operations to support our customers, but we were also able to focus on optimizing our cost structure through facility and process improvements and to fortify our financial position. I give credit to our entire team for their resilience and diligently implementing those plans and adapting to the changing environment throughout the year. After navigating a challenging second quarter in 2020 when many customers were forced to temporarily shut down their facilities, we delivered improved results in the second half of the year as customers were able to ramp up production. I'm very proud of the fact that despite volume declines driven by the pandemic, we maintained every project and took care of every customer. In addition, we were able to grow volumes with new customers and build upon our market-leading position. At the same time, we continued to realign our operations and realized 3 significant improvements in our operational efficiency throughout the year. First, by capturing full year benefits from the acquisition of Defiance Metal Products, which is now fully integrated into our organization and producing the expected synergies and results. Second, by realizing efficiencies from our reduced -- from our recent investments in technology and automation. And third, from the consolidation of our Greenwood South Carolina facility. Executing this project in South Carolina successfully reduced our footprint and overhead costs while maintaining our manufacturing capacity. We completed it on time, on budget and without any disruption to our customers. Overall, we saw a strong rebound in the second half of 2020, and ended the year on a positive note. It is important to note that despite the challenges of the pandemic, we generated strong cash flow, resulting in significant debt paydown, which Todd will cover later. In the meantime, MEC continues to focus on our 4 foundational imperatives for success: quality, cost, speed and outstanding customer service. We demand of ourselves that we are the highest quality, most cost efficient, most agile fabricator in the world. Our customers are our partners, and we strive for their success. We collaborate on design and manufacturing so the product can be developed be developed, and assembled in the best possible way. Our partners know that our expertise in value engineering and the geographic scale we can provide, combined with state-of-the-art technology is a powerful combination. And when you add in our most important asset, our best-in-class workforce, our customers know we'll produce for them every time. This leads to a robust pipeline of new opportunities with numerous new projects being actively pursued, which continues to build the excitement within our organization about the potential opportunities in 2021. The flexibility and resources we have to grow our business will ensure MEC continues to thrive when our competition starts to falter. We are seeing the benefits of the significant flexible automation capital investments we continue to make, while continuing to implement the necessary cost adjustments that come with market fluctuations. I continue to be invigorated every day by the large addressable opportunities that MEC has for continued growth and improved business results. My fellow employee shareholders and their commitment to our company is outstanding. They know our history of prudently yet actively investing in leading-edge technology, and they appreciate the 3 primary areas we will invest in for our future. The first area is organic growth. We believe there is a significant addressable market opportunity with our strong one-stop offerings. Outsourcing in our served markets will continue to grow. As a well-diversified market leader, MEC can also shift between served markets, establishing enhanced revenue streams and attractive adjacent or complementary platforms through our new product extensions. Earlier this month, we announced a new and meaningful top 10 customer relationship with an innovative pioneer in the world of fitness. The new customer relationship will add a new consumer market, augmenting diversification of our revenues. Based on current plans and projections, the new customers expected to become a top 10 customer by revenue in 2022, and will require that we invest between $35 million and $45 million in equipment and factory automation. This is tangible proof that our strategy for growth and market diversification is working. The second area for growth, process and capital-driven improvement initiatives, driven by our imperatives for quality, cost and speed. This prong of our strategy will continue to include smart investment and flexible redeployable automation coupled with continuous improvement activities. This will allow us to extend our differentiated and defendable market-leading position as well as drive ongoing cost and operating improvements. Third prong is acquisitions. Our reputation, scale and track record of performance make us the buyer of choice. When the time comes to sell their business, we believe most competitors would prefer to sell to a strategic and synergistic market leaders like MEC, with a long-term value-creating innovative culture. To summarize, we are diversified and well positioned in the end markets we serve with a new market recently added, and have shown we can manage our business through all cycles. We have the resources and scale that none of our competitors possess. Our disciplined capital allocation that has driven our growth will continue to serve us well. Our dedicated workforce will continue to help our customers through unrivaled innovation. I want to leave you with this parting thought that I have emphasized throughout my tenure of MEC, our mantra of being the best, truly drives every decision, every investment in every initiative we undertake. In short, it is why we are the largest and most successful fabricator in the country. In closing, I'd like to thank my executive team, my Board members and all MEC employees for their tireless efforts throughout this year and their belief in our company and our mission. Now I will hand it over to Todd Butz, our Chief Financial Officer, who will briefly review our 2020 financial performance.

Thank you, Bob. 2020 was another transformational leader for MEC. We finished the year with net sales of $357.6 million as compared to $519.7 million in 2019, a decrease of $162.1 million or 31.2% driven by volume reductions related to destocking activities and market demand changes, primarily driven by the pandemic. Net loss for the full year 2020 was $7.1 million related to underabsorbed fixed overhead costs associated to the aforementioned volume reductions. Adjusted EBITDA and adjusted EBITDA margin percent for the full year 2020 finished at $32.8 million and 9.2% as compared to $54.7 million and 10.5% for 2019, resulted in a decremental margin of 13.5% as compared to our historical average of 17.5%. The improved decremental margin percentage is attributable to our effective implementation of cost reduction activities, including the Greenwood South Carolina facility closure, a full year of DMP synergies, and leveraging our recent investment in new technologies and automation. It is important to note that these cost adjustments are permanent, provided a clear path to 15% adjusted EBITDA margin expectation when manufacturing volumes return to pre-pandemic levels in the coming years. Capital expenditures for 2020 totaled $7.8 million as compared to $25.8 million in 2019, a decrease of $18 million. The decline was driven by a 2019 investment cycle that focus heavily on investments in new technology and automation versus more of a focus on leveraging those previous investments in 2020. In the normal course of business, we continue to expect our annual CapEx to approximate $20 million per year, which is a combination of maintenance capital, along with continued investment in new technologies and automation. In June 2020, we entered into an amendment to the credit agreement that provided the company increased liquidity and flexibility against future macroeconomic events by changing our total leverage ratio covenant for the period from June 30, 2020, through December 31, 2021. Despite the challenges posed by the pandemic, we generated strong cash flow, resulting in significant debt paid down, ending 2020 with $47.9 million of debt and a leverage ratio of approximately 1.5x. Additionally, as you may have noted in our recent press release, we did enter into a third amendment to our credit agreement to allow the company to increase its maximum capital expenditures to $70 million versus $35 million in 2021 to allow for the investment in a new customer relationship Bob discussed earlier. Finally, although we are not providing specific guidance at this time, we do believe that our 2021 results will exceed our 2020 performance based on generally improving market conditions, but will not return to pre-pandemic levels this year. I will now turn the call back over to Bob.

Thanks, Todd. Now we will 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. As a reminder, shareholders can submit questions now on the web portal for this meeting. Out of consideration for others, please limit your questions to one. We will attempt to answer as many questions as time allow us, but only questions that are germane to the meeting and/or our business will be addressed. Hearing no questions, I would want to conclude the meeting just by thanking you for attending our Virtual 2021 Annual Meeting. We appreciate your interest in MEC. Thank you.