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

All right. Good morning, everyone, and welcome to all of those joining us live here at Hazel Park and via webcast for MEC's Inaugural 2023 Investor Day. Before we begin, I'd like to remind you that 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, today's event will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measures are disclosed in today's presentation materials. Before the market opened today, we issued a press release summarizing the key highlights of today's presentation. This release, together with the accompanying Investor Day presentation materials are available at the Investor Relations section of the company's website at ir.mecinc.com. We have an exceptional lineup today of speakers. Leading off will be our CEO, Jag Reddy, who will provide us with introductory remarks together with detailed road map for our strategic growth over the next 3 years. Following Jag will be Ryan Raber, EVP of Strategy, Sales and Marketing, who will walk us through the opportunities for commercial growth that lay ahead for our business. Following Ryan will be Rand Stille, our Chief Operating Officer, who will provide us with an update on our ongoing operational excellence initiatives. Following Rand concluding us today will be Todd Butz, our CFO, and he'll provide a detailed look at our financial outlook for the business. After our prepared remarks, we'll be taking questions both live and over the Q&A chat function available at ir.mecinc.com. With that, I'd like to welcome Jag to the podium for his prepared remarks.

Thank you, Stefan. Good morning, everybody. Thank you all for joining us, both in person and online through our webcast. It's great to see many of you in person. Thank you, Mig, Larry, Ted and Vlad and others for joining us at our Hazel Park facility. We're really excited to share all of our future growth prospects and more importantly, really showcase the investments we have made in our Hazel Park facility, and I hope you all will like that. For those of you who don't know me, my name is Jag Reddy. I've been with MEC for the past year as President and Chief Executive Officer. Since joining MEC as CEO year ago, I have had the privilege of working closely with our teams, our customers and our partners as we build a differentiated solutions-based platform that integrates best-in-class design, engineering and fabrication capabilities. As many of you are aware, MEC is the largest fabricator in the nation, but just -- that is just part of our story. During the past 80 years, MEC has built a reputation for having the most talented, skilled and engineering employees in the industry. Our domain expertise has led to deep customer relationships, many of which span decades. Innovation is core to our value proposition, an approach that has embedded us in some of the most bespoke applications of our diverse customer base. We have one of the largest domestic manufacturing footprints in our industry, allowing us to capitalize on reshoring and onshoring trends while leveraging economies of scale. We also are incredibly lean and getting leaner, further supporting our profitable growth through the cycle. Over the last year, we have made significant strides as an organization, but we're just getting started. Today, I plan to walk you through how MEC intends to capitalize on significant opportunities that lie ahead of us and how these opportunities can translate to meaningful value creation for our shareholders. Let's begin today by turning to Slide 4 of our Investor Day presentation materials. As we move through our presentation today, you will notice that all of our comments support a few key themes that are driving our 3-year outlook for the business. In 2022, shortly after I joined the company, we launched our MEC Business Excellence, or MBX, which guides how we intend to accelerate growth and profitability both now and years ahead. The MBX framework has several key pillars, including targeted commercial expansion within higher-value adjacent markets, implementation of more efficient business processes, improved asset optimization and productivity and standardize operating practices across the enterprise. Our execution of each pillar is made possible by the development of a high-performance culture where a commitment to safety, customer service, accountability and integrity sit at the core of all we do. Over the next 3 years, we intend to leverage our MBX strategy to deliver revenue growth of 30%, increase our adjusted EBITDA margins by 300 to 400 basis points to 14% to 16% and double our free cash flow generation from full year 2023 levels. It is an ambitious forecast, but one, we have risk adjusted to reflect demand conditions across our diverse end markets. Turning now to Slides 5 through 7. Before we dig into what's next for MEC, allow me to provide a high-level overview of our business. Today, we're the largest vertically integrated, value-added provider of custom prototyping, design and fabrication services in the U.S. We have approximately 2,550 employees across 22 operational facilities in the Continental U.S. We pride our results on being a one-stop shop, providing end-to-end solutions across the entire product life cycle. We hold a geographic presence in the industrial heartland, allowing us to satisfy our customers' needs. Additionally, we have a lengthy track record of consolidation through M&A and are disciplined with our capital investments. We are proud of our long history of innovation and growth beginning in 1945 with Ted and Leo Bachhuber founding MEC in Mayville, Wisconsin. M&A has been a key driver for our transformational growth over the history of MEC, allowing us to offer a full breadth of solutions to meet our customers' individual needs. I'm only the fifth CEO in our almost 80-year history. On Slide 8, you will see that in the past year, we have made significant progress in building a more efficient and more capable business of scale. We have added key talent to support our transformation and enable our future growth. And we are invested in that through people, processes and M&A. We are well positioned with energy transition trends, that offer significant growth opportunities. Further, investing in our growth, productivity and efficiency, we launched MBX to drive margin expansion and operational and commercial excellence initiatives. Here on Slide 9, you will find our MBX framework. At MEC, culture drives performance. In practice, this means we develop and retain top talent while positioning them to succeed through continuous development, training and access to next level opportunities. To achieve MEC's full potential and. drive profitable growth, we need to implement a lean culture, drive process discipline and standardize how we execute our plans. Commercial excellence drives best practices in sales funnel management and strategic pricing, while operational excellence drives capacity utilization, productivity and cash flow generation. This framework is the cornerstone to driving value creation for our shareholders. With that background, now let's turn to Slide 10. We have key strategic objectives to continue pushing us forward. These are prioritized by the launch and execution of MBX across the enterprise, organic growth with share gains and new project wins, including energy transition applications, margin expansion with pricing and capacity utilization and focusing on significant cash flow generation and subsequent debt reduction. When we discuss culture, Slide 11 is what we strive for. Integrating various businesses and operating as one to break down silos. One MEC, one mission allows us to empower our team to create premium products and solutions for customers, enabling growth for our employees, shareholders and communities we serve. Our values are the foundation of our company and shape how we do business and treat one another. Integrity, respect and teamwork combined with our commitment to agility, customer focus and collaboration drives our high-performance culture. One MEC, one mission is our commitment to our teams, to ourselves and to our shareholders. Slide 12. Switching to Slide 12, focuses our efforts on talent. Our strategic success is dependent on our people and in order to be successful, we need to operate as one company, one MEC, one mission. That begins with driving standardization and consistency in every function and every location. To achieve that, we need to focus on talent acquisition and employee value proposition to attract the employee of choice. We need access to different pools of talent. We need to tell our story, why MEC and add top talent to our team. We need an engaging culture where top talent wants to work. We have to pay for performance with the total rewards program. We have to provide clarity on that work and appropriate total rewards so that we can continue to attract and retain the top talent. Talent management and succession planning, we have to identify critical positions, align skills needed for these critical positions and provide developmental opportunities for talent in those critical positions. Now let's turn to Slide 13, where we lay out our organic growth. Our organic growth acceleration is fueled by macro drivers such as reshoring and outsourcing, which remain multiyear trends that MEC is uniquely positioned to capitalize on. Additionally, our entrance into energy transition focused end markets is expected to contribute more than $75 million of growth over the next 3 years. Further, as a provider of full life cycle solutions to major OEMs, MEC is best positioned to win additional business as OEMs consolidate suppliers, putting us on a path to $750 million to $850 million in organic growth, high single-digit to low double-digit CAGR over the next 3 years. On Slide 14, we lay out market growth versus MEC growth. Our 3-year forecast expects end market diversification and energy transition growth to smooth out cyclicality in our traditional markets. New business wins in commercial vehicles, power sports and ag add to the medium-term growth while outsourcing and onshoring trends continue. Slide 15 provides additional color on key end markets. Our commercial vehicle market outlook anticipates growth over the next 3 years, even with a down year in 2024. We expect the construction market to recover next year as the housing market and infrastructure spending start to stabilize. Power Sports growth will moderate as household savings and consumption stabilize. The agriculture market continues to be strong over the next 3 years as crop prices remain high due to weather patterns and global conflicts. Continuing on to Slide 16. Recent data on macro trends has shown that Mexico has overtaken China as the largest U.S. trading partner. The shift in trade flows confirms the trends of reshoring and onshoring. To reduce dependence on Asian suppliers, OEMs continue to reconfigure supply chains, supplier consolidations and outsourcing trends also support long-term growth for MEC. Energy transition provides large opportunities for MEC to drive deeper penetration into battery electric vehicles and charging infrastructure. Inflation Reduction Act offered significant incentives related to renewable energy and energy infrastructure. Given the growth potential we just laid out, and MBX execution, Slide 17 shows our forecast for EBITDA margin expansion. Our 3-year target is to achieve 14% to 16% adjusted EBITDA margins by executing our MBX framework with operating excellence contributing approximately 100 to 150 basis points, pricing contributing 200 to 250 basis points, Hazel Park optimization another 100 to 150 basis points, supply chain efficiencies and improved SG&A leverage each adding 50 basis points. These will more than offset any future inflation in wages and other items. That said, longer term, we believe MEC could achieve 18% adjusted EBITDA margins through a combination of increased asset optimization and entry into higher-margin verticals, such as those provided by the MSA acquisition, which I will touch on shortly. Slide 18 shares our free cash flow forecast. We expect to generate approximately $200 million in free cash flow over the next 3 years. We're intensely focused on debt reduction and expect to get to 1.5x leverage in the next 12 to 18 months with a long-term goal to remain under 2.5x leverage. Annual CapEx of $15 million to $20 million is sufficient to achieve approximately $800 million of organic revenues while investing in automation and other productivity enhancements. We also expect to continue M&A investments once the leverage ratio comes down in the near term. We also have approximately $17 million remaining in our share repurchase authorization that we intend to use opportunistically from time to time given our positive outlook for the business. I am pleased that many of you are in person at Hazel Park. We discussed a lot about Hazel Park investment over the past couple of years. Slide 19 reiterates our forecast of Hazel Park ramp-up. Currently, our intent is to exit 2024 with an annualized run rate of $100 million of revenue at Hazel Park. There are $45 million of new programs currently in hand, plus $30 million of program transfers with a need to obtain an additional $25 million in new business. Importantly, the $30 million of planned transfers have been backfilled at other locations. The Hazel Park facility provides flexibility and scale to optimize the manufacturing network, particularly given the large skilled labor pool that's readily available in the Detroit metro area. Let me turn to Slide 20 to lay out our M&A framework. Our acquisition criteria requires an internal rate of return greater than 15% post synergies and an internal rate of return of 11% to 12% on a stand-alone basis. We are laser focused on diversification and energy transition with an initial focus on lightweighting, and cross-selling into current customers. We have built a disciplined M&A process and are building a robust funnel of future potential targets. Let's look at Slide 21 for a quick overview of our recent acquisition. MSA is a great example of the type of company we want to own. This acquisition provides additional capacity in a constrained higher-margin industry. Integration is underway and going smoothly. We are excited about the growth opportunities and cross-selling synergies that MSA brings to MEC. We are currently in the process of being qualified by commercial vehicle and other industry customers to be a supplier. I'm excited to announce that within 60 days of closing the transaction, we received our first purchase order for MSA fabrication from a current CV customer. Please turn to Slide 22. Our strategic rationale is to offer lightweight materials to MEC customers who are transitioning their platforms to battery electric offerings. We were able to confirm cross-selling synergies with our OEM customers during due diligence. MSA EBITDA margin and free cash flow are accretive to the base MEC business. Now on Slide 23, let's review the alignment with our value creation framework. Importantly, this rationale and the MSA acquisition as a whole is closely aligned with our MBX strategic framework, particularly as it relates to commercial expansion and disciplined capital deployment. The acquisition also augmented our pipeline of skilled labor and provides opportunity for further synergies through operational excellence and high-performance culture. This framework provides a great foundation for MAC as we look to future acquisitions. In summary, on Slide 24, we see an exciting path forward towards long-term value creation. To wrap up my comments, now I'm on Slide 25. The MBX framework provides a clear path for value creation with a path towards sustained revenue growth, margin expansion and incremental free cash generation, which will support a combination of further debt reduction, share repurchases and opportunistic acquisitions. With that introduction, I would like to turn over to Ryan Raber, who will dive deeper into our commercial expansion opportunities.

Thank you, Jag, and good morning, everyone. I'm Ryan Raber, Executive Vice President of Strategy Sales and Marketing. I've been with the company for 14 years and have served in my current role for the last 4. Starting on Slide 27 and building upon Jag's earlier comments, we continue to see significant runway for higher value commercial growth both at legacy customers and with the new market adjacencies. As Jag noted, we currently see the potential to deliver organic revenue growth of approximately 30% over the next 3 years. Our quoted opportunities continue to be robust. We're confident in our business prospects and ability to convert on those opportunities. Within the framework of MBX, we've been very focused on commercial excellence, and as a result, have strengthened our business processes and made investments in technology and automation, which will drive margin expansion on both our base business and within new accounts through a programmatic approach to value pricing. MEC will continue to go beyond just being a production supplier focused on the upfront design for manufacturability and prototype phases, leading to larger production volumes and also complementing production with aftermarket support through the full product life cycle. In the last year, we have strengthened our focus on industry diversification with significant focus on emerging technologies related to energy transition, electric vehicles and the product progression that will occur over time. We have seen success both within our core customers and also with new customers to MEC. Turning now to Slide 28. As we look ahead, we have significant growth potential with our current customers with the SAM estimated in excess of $5 billion, representing roughly a 12% market share for MEC. We see the potential for significant share gains in what remains a very highly fragmented market. While share gains in new vertical markets remain an exciting opportunity for us, we see meaningful potential to grow our content across existing customers and markets where we built a strong incumbent position. Again, having earned the trust of our customers, we've been afforded the opportunity to participate within new technology platforms on the horizon, further entrenching us as a valued partner and incumbent. Further, with the recent acquisition of MSA, we've expanded our capabilities within higher-value lightweight materials, such as aluminum extrusions, which opens the door to a host of new cross-selling opportunities that were previously unavailable to us. As you can see on Slide 29, MEC does business with market leaders in their respective industries and has a track record of long-standing and growing relationships. Our rich history of being an integral member of the supply chain for major OEMs continues to bring significant opportunities, and we continue to focus on adding new blue-chip names to our customer list. Digging deeper into this on Slide 30. Over the last 18 months, MEC has secured in excess of $115 million in new sales opportunities, averaging roughly $20 million in awards per quarter with numerous high-value quotations in our pipeline. We are intently focused on supporting new product development cycles, expanding market share through new launches. We continue to see opportunities with customer outsourcing and reshoring, expanding further as customers refocus their factories and move to regionalize production. Also, customer supplier consolidation continues to present near-term opportunities as customers realign their supply chains in a post-COVID environment. And finally, cross-selling, leveraging MEC's relationships and market position to bring more products to market and further expand our already deep relationships. As we look forward to our new -- to our 3-year revenue target, we have more than half of the revenues required secured and booked, with significant opportunities to close on business to realize the additional $140 million needed. On Slide 31, we'll discuss an example where we recently onboarded a large Power Sports customer. Between 2019 and our 2024 estimate, we're projected to grow revenue with this customer by 5x. While at first, we supported their current product offering, we've won numerous awards to support them on new EV categories and new machine types. MEC's breadth of process offerings and locations allowed for significant technical support and rapid speed to launch, currently supporting this customer from 4 MEC locations. Our pipeline continues to be strong, and we expect this relationship to further grow in the years ahead. Now turning to margin expansion on Slide 32. Through the application of the MBX framework to our commercial processes, we've implemented a programmatic approach to pricing for both new business and our current products. In our programmatic pricing model, we're focused on cost to serve by customer, taking into account our terms, engineering and quality intensity and the size of the relationship. We're also focused on part complexity, type of opportunity, the competitive environment and MEC's internal capacities. By shifting from a cost-plus model to a value-based approach, we expect to deliver between 200 to 250 basis points of improvement in adjusted EBITDA performance over the next 3 years. Through process improvements and technology investments, we've ensured this is a structural process in our business, and we will sustain the pricing improvements while eliminating leakage over time. Looking at Slide 33. At MEC, our team is focused not only on production but the full product life cycle, including design, prototype and aftermarket. Through engagement and design for manufacturability, partnering with our customers to provide the most value, we are able to secure higher-margin prototype samples while also significantly increasing our probability of production awards while also mitigating risk in the process. After serial production ends, we see an opportunity to grow revenues and expand margins through supportive aftermarket programs for our customers and harvesting profits and revenues over a long duration of our goods. Slide 34 shows a recent and great example of MEC's supporting design for manufacturability and prototype and the work we're doing, supporting a manufacturer of light duty commercial truck engines. We are engaged early and supported the full product design and product testing. Through deep knowledge of both product use and technical requirements, combined with a robust process automation plant production, we provided significant value to our customer. Through providing beta and prototype samples, we are able to fine-tune our processes. With all this activity, leading to annualized revenues in excess of $20 million in this program, which will begin production in late 2024 here in Hazel Park. On Slide 35, I'll walk through an aftermarket example where we have the opportunity to support a commercial vehicle customer and grow further in the aftermarket. Given the breadth of product offerings we can offer from our tank manufacturing location, we were able to expand our finish offerings based upon plant capacity while also supporting dealer direct shipments. Overall, benefiting the end customer while also reducing network inventory. Through creative and flexible offerings, both MEC and our customer was able to capture a greater percentage of overall market share. Turning to Slide 36. As Jag mentioned earlier, we see significant opportunity to grow our market share, supporting the mega trend of energy transition. Many of our current customers are launching innovative new vehicles and platforms, which MEC is positioned well to support, and we're seeing significant opportunities with new customers and in new markets such as charging stations, energy infrastructure and alternative energy products. We are targeting $60 million to $80 million in revenues in 2026 from these markets with current line of sight to roughly half of our goal. Highlighted on Slide 37 is a great example of leveraging our size and rich history supporting a new customer. As our customer in the EV and battery thermal management space expanded quickly, MEC was in a unique position to support outsourcing from the current facilities and simultaneously supporting their new product introductions. With open capacity in our Hazel Park facility and the breadth of process offerings and engineering and technical support we're able to offer, we have significant growth awarded and launching over numerous MEC facilities that will be realized over the next 3 years as EVs continue to build momentum in the market. Then closing, looking at Slide 38, MEC is well positioned to drive organic growth to achieve our 30% organic growth target by 2026. This is not a stretch goal. This is entirely achievable given what we know today. With a focus on the full product life cycle and expansion into emerging technologies, we have a robust pipeline that will continue to fill our capacities. Through our commercial excellence initiative, we have the systems in place to drive programmatic pricing and margin expansion, driving profit opportunities on new business while generating more value in our base business. MEC is positioned well to take advantage of a strong macro market, and we look forward to discussing growth opportunities with you in the quarters ahead. Thank you.

Thank you, Ryan. I look forward to seeing how our focus on market expansion through process improvement will continue to grow our market share, diversify our end markets and bolster our organic growth. To further showcase our operational improvements, I would like to hand the floor over to Rand Stille.

Thank you, Jag. Good morning, everyone. My name is Rand Stille, I'm the Chief Operating Officer here at MEC. I've been at MEC for 4 great years, and I've been in this role since 2020. During my tenure, MEC has seen tremendous growth, which is exciting, in particular, in our systems, our processes and our approaches, we feel we've built a new foundation and platform for us to better serve our growing base of customers and the project requirements that they have. So today, I will walk us through the primary areas of operational focus. First, we're going to start with margin expansion through operational excellence. We're going to talk a lot about MBX here and the impact it's having on our company. Secondly, we're going to talk about inventory reduction and our goals to improve our working capital efficiency. Then third, we'll talk about our recent investments in automation and advanced manufacturing. Finally, we'll review our plans to drive better capital utilization both here at Hazel Park and across the entire organization. So let's dive into MBX on Slide 41. As Jag introduced earlier, MBX is MEC's lean initiative that was put in place in September of 2022 to drive excellence across the entire organization. MBX utilizes world-class practices and proven lean methods with concentration on 4 key areas: strategy execution, commercial excellence, operational excellence and talent management. We believe that this approach will allow us to ensure that we are driving a lean mindset across the entire organization. When talking more specifically within operation -- within operations, MBX has an abundance of tools for us to apply. These tools provide means to identify issues, eliminate waste and enhance our overall performance. At MEC, we monitor our company's operational performance with numerous measures. However, we have identified 5 key performance indicators as our primary targets. Those 5 KPIs are safety, quality, delivery, inventory and productivity. The good news about MBX is that regardless of the measure, the tools help us to quickly identify root causes of the issues we're facing and then develop corrective actions to eliminate those root causes. So MBX can help us improve any measure that we happen to target. On Slide 43, we're going to talk about how we establish MBX. To drive proficient use of the MBX tools, MEC created a department dedicated to learning and training the entire MBX toolbox, leading all the events and ensuring that the improvements that are made are sustained well after the event has occurred. Leading this team is the Vice President of MEC Business Excellence and reporting to him is a team of dedicated MBX engineers. These engineers have gone through extensive lean training. And then every site we have, has a MEC MBX engineer dedicated to it to lead its lean activities at that facility. Finally, we created a MEC war room at each facility to track, plan and monitor the sites specific MEC -- sorry, specific MBX progress. One important measure is the sustainability measure. Each MBX event develops a measure that will ensure that the improvements that are made during the week of the event itself are sustained going forward. This measure is then tracked in the war room for each of our sites for a full year after the event occurs, again, making sure that the improvements that are made are sustained going forward. So we believe that by establishing a dedicated team with a proven leader and developing war rooms to track the progress at each site that MBX will have a strong and sustained impact on MEC. All right. So how are we doing so far? We're delighted to share that we are off to a great start. In the first 6 months of 2023, we have held 75 events. Every site has held an event and 350 unique participants contribute to the effort. One of the best parts of having so many participants, 350 of them is that the tools they receive during the events, they carry forward with them. So this helps us spread the lean mindset across the organization and also grow enthusiasm to drive continuous improvement every day they come here. The ultimate measure of those in our savings progress. Again, we're very happy with the progress. We're happy to report that we're right on track. In the first half of 2023, we generated $1.6 million of savings year-to-date, and that is on track with our goal of improving 40 to 70 basis points. Starting on Slide 45, we're going to share a couple of case studies here. We'd like to share a case study, starting with the implementation of a Value Stream Map. Okay? A Value Stream Map is used to study a particular product flow to identify waste in the existing process and then also to help us develop optimized alternatives. In this case, the Valley Stream app was used on a battery box assembly process. Before the event, the team recognized that the original process had several subcomponents. And in that very structure, that meant that had a lot of material handling and material handling can be viewed as waste. They recognize the opportunity to get this into one singular robotic process. So the team developed a Value Stream Map that captured each step of the process, every square foot, every piece of inventory, all the cycle times involved, even the flow of information between the different processes. And you can see in the middle of the slide there under action, they developed all these actions, and they recognize all these opportunities to make these improvements. Each one of these improvements was made during the week of the event, so it's there, it's permanent, and it will stick with us going forward. In the outcome, they were able to improve the final weld assembly time by 1,577 hours annually and able to get it into one combined balance process. So what does that mean? Well, that means everything within the scope, the entire scope of this process, we are able to reduce 24% of the labor that was involved in that. That's a significant change for a 1-week event. The second case study on Slide 46 involves improving changeover time on a coil press. Simply put, our stamping presses only generate revenues when they're producing parts. So the more time they are in changeover means less revenue. Therefore, every minute counts during changeovers, and that is the exact focus of SMED, a single-minute exchange of dies. Looking at every step of the changeover process, a SMED is used to eliminate any unnecessary time. So in this case, the team identified an opportunity on a coil press at the Byron Center operations. The changeovers were not standardized. Therefore, they are poorly executed, and they're taking too much of the capacity away from the press and wasting labor costs as well. So using the SMED process, the team monitored every step of the original process while looking for wasted time. This could be time waiting for material handling or looking for tools or even getting a technical answer when you're doing the changeover. So again, once they did those observations, they created an action list here in the center of the slide, you can see all the steps that they made. These happened during the week of the event. They're able to reduce the amount of travel done by the operator. They created setup cards. They even defined an area for staging so that the press could continue to operate while they prepared for the changeover. And then they canonized all this with standardized work and documentation so that this is the way we're doing it going forward with every operator, with every changeover. So the outcome was that they were able to reduce the average changeover by -- from 68 minutes to 34 minutes. Think about it. That's a 50% improvement in 1 week event. That's amazing. We don't get changes like that very often. These are just 2 of the 75 events we've done here in the first half of this year, and we're going to continue doing this going forward. So that's why we're so excited about MBX and the impact it's having on our operations. The second key initiative in our pursuit of operational excellence is our goal to double inventory turns from 6 to 12. We've already started to implement a sales inventory and operations planning process, otherwise known as SIOP to better forecast customer demand and, therefore, eliminate excess inventory generated by inaccurate demand signals. We expect to have the SIOP process in place at every site at the end of this very quarter. An early case study of our SIOP process and its positive impact is available from our Byron Center operations, and it's shown here on Slide 48. The team recognized that we had volatile, inaccurate and generally overstated demand signals coming from our customers, and this was driving excess raw and WIP inventories into our system. So the team developed a SIOP process that accounted for these trends and customer tendencies to improve our own internal demand forecasting. And with that more accurate demand forecasting, the team reviewed the inventory parameters or what we call a plan for every part to reduce unnecessary inventory and material that was generated from the previous demand schedules. The outcome is that since we implemented SIOP at this Byron Center facility in January of 2023, we've eliminated $3 million of wasted inventory or excess inventory. This, along with other initiatives has allowed us to go from 6 turns to 8 turns just in the first half of this year. So we're well on our way to our ultimate goal of 12 turns. The third component of our MEC operational excellence strategy is to employ the very best technology in our operations. Over the past 3 years, MEC has separated itself from the competition with significant enhancements in automation, a total investment of $30 million. Moving to Slide 50, We'll talk more specifically about these investments. Again, over the last 3 years, MEC has installed 11 new fiber lasers that range from 10,000 to 12,000 kilowatts of capacity. These lasers are more than 5x faster than CO2 lasers. Additionally, in our brake press and welding departments, we have implemented 52 new robots into the operations. So what does all this mean? Well, due to these significant investments in technology, MEC has reduced its required head count by 700 full-time employees and improved productivity per associate by 35%. That's a very significant change. We're very excited about our results here. In the final piece of our operational excellence strategy is driving better utilization of our existing capital. Right here in Hazel Park, we have all the capital to support our growth plans. The SKUs that we are launching in 2023 will generate $74 million in annual revenue when they reach full volumes. Additionally, we remain very excited about the Hazel Park labor market and are confident that we'll be able to operate the facility on a 4-shift, 7 days a week schedule. We confidently project Hazel Park can provide well over $100 million in revenue by 2025. Stepping to Slide 52. In addition to soon operating Hazel Park on a 4-shift, 7-day a week schedule, we are confident that we will improve our utilization at all of our MEC's sites by adding third and where appropriate, 4-shift schedules as well. Currently, the majority of our major assets operate somewhere between 55% and 65% of their total available capacity. So by staffing these assets on premium shifts and driving better utilization, MEC already has significant available capacity to support the wonderful growth plans that Ryan just talked about. So in summary, we are off to a great start on MBX and remain confident in our long-term targets. By implementing SIOP and utilizing lean tools, we are on the path to double our turns. Our investments in the best technology available has further separated MEC from our competition and finally, we have a great opportunity to improve our utilization by filling Hazel Park and staffing premium shifts at other sites. Thank you for your time. With that, I'll hand it back over to Jag.

Thank you, Rand. The impact of the execution of the MBX processes has truly shifted how we operate. We run more safely, efficiently and with purpose. I look forward to seeing how you and your team will continue to further our growth. With that, I will turn it over to Todd Butz, our CFO, for his prepared remarks around the strong financial outlook we see for MEC over the next 3 years.

All right. Thank you, Jag, and welcome, everyone. My name is Todd Butz, I'm the Chief Financial Officer at MEC. I look forward to sharing some further financial details on our growth story today. So certainly, value creation begins with growth. And as Ryan and Jag outlined earlier, organic growth is a key focus for the company, as is driving continued margin expansion and generating strong, consistent free cash flow. Our expected build of free cash flow in the coming years will allow the company to delever over the next 18 months and continue to execute on our capital deployment strategies, which in turn will drive meaningful shareholder value. While I know today is primarily focused on the future of MEC, I would like also to reflect on the great progress we have made since becoming public in 2019 and how that positions us for a continued future success. Certainly, the pandemic created some new challenges to our business, such as labor availability, increased cost, customer supply chain constraints and longer supplier lead times, just to name a few. But I think we've shown our ability as a company to be resilient and overcome these challenges and are stronger today than we were before the pandemic. Certainly, in 2019, as you can see on this slide, the company delivered $55 million of adjusted EBITDA on $520 million of sales, which equals a margin percentage of approximately 10.5%. For this year, we expect to deliver between $66 million and $71 million of adjusted EBITDA on $580 million to $610 million of sales or approximately 11% to 12% adjusted EBITDA margin. While this improvement may not seem significant on its face, keep in mind, it includes 100 basis points of negative results this year from the launch of Hazel Park. As without this impact, the true margin improvement would be 150 to 250 basis points just in the last few years. Additionally, in 2019, we employed approximately 3,100 employees in order to achieve $520 million in sales. And in the current year, we expect to deliver again sales in the range of $580 million to $610 million with less than 2,600 employees. You may wonder how can we do that? Well, the answer is simple. In the past few years, we've made significant investments in our plans by upgrading them with new technologies and equipment, thereby reducing our dependency on direct labor. These capital investments, coupled with operating efficiency gains have resulted in record level EBITDA returns, 3 of the past 5 years and significantly improved EPS performance. As Ryan spoke to earlier, continued organic market share gains, coupled with the cross-selling opportunities of our new lightweighting capabilities in aluminum extrusions from our recent acquisition and strategic value pricing, will fuel our growth. Again, we are estimating our 2026 revenues to be between $750 million to $850 million which equals an 8% to 12% compounded annual growth rate. Outsourcing, onshoring and energy transition are real multiyear trends that we continue to see significant opportunities that we can capitalize upon. Not only will these trends benefit us from a volume and utilization standpoint, but they also position the company to be more strategic in our approach to capture pricing. As customers pivot towards more domestic skilled labor pools that can provide on-time, high-quality products, the impact of the organic growth is expected to be between $100 million and $140 million over the next 3 years. As Jag outlined earlier, one of the key reasons for our recent acquisition is the ability for us to cross-sell the aluminum capability to our existing customers. And as mentioned, we have already landed new work with our existing customers that we will launch in the coming months. And we have identified a number of other cross-selling opportunities that are expected to generate between $60 million to $80 million of incremental sales over the next 3 years. Continued pricing excellence activities will also drive an additional $30 million to $50 million in sales over that same time frame. But please note that a portion of that pricing is expected to offset future inflationary wage pressures. After factoring in the impact of end-of-life programs, we are again estimating our revenues to be between the $750 million to $850 million range by 2026, which excludes any further M&A activity, which will be only incremental to this growth. So in the past, we've talked a lot about margin expansion. And certainly, I feel like we've made a lot of progress over the last few years to achieve that initial goal that we put out there a 15% adjusted EBITDA margins. Unfortunately, much of that progress has been masked by the repositioning of Hazel Park new product launch activities, erratic customer production schedules and inflationary pressures. Today, I stand before you with even more conviction that we can deliver 14% to 16% adjusted EBITDA margins by 2026. As I mentioned on the prior slide, pricing excellence activities will generate between 200 and 250 basis points. Again, some of that will offset wage inflationary pressures. We also expect to expand our margins by 100 to 150 basis points over the next 3 years through the implementation of our MBX program, which, as Rand mentioned, has already yielded significant savings in its first year. Again, as Rand discussed earlier, plant utilization has been a key priority for us and as we bring Hazel Park up to production levels that are closer to the plant's capacity, and we complete the execution of current product launches along with filling of our off-shifts, we expect to deliver an additional 100 to 150 basis points of adjusted EBITDA margin improvement. Another key component of our MBX program is strong supply chain management. And as such, we expect approximately 50 basis points of savings by 2026. Also note that, that is net of material and other nonwage-related inflationary pressures. The last component is leveraging our SG&A. And as we go, we expect to leverage our SG&A by approximately 50 basis points in the coming years. The end result, again, is an adjusted EBITDA margin performance of between 14% to 16% by 2026. But keep in mind, this is not our end goal. Rather, it's our first step as we firmly believe we can continue to improve our margin performance well into the future. As I mentioned on the prior slide, as we continue to grow, we expect to leverage our SG&A. As we already have the staff and systems in place to support the business at the $750 million to $850 million run rate, again, this will provide 50 basis points of additional improvement by 2026 and note again that this includes 3% annual wage inflation as well as an additional $1.5 million to $2 million of annual public company expenses related to the company no longer being considered an emerging growth company in 2024. Turning to free cash flow generation. As we've spoken, we have invested more than $100 million in CapEx over the past few years. Of that $100 million of capital spending, approximately $50 million was related to repositioning and launching of Hazel Park with the remainder -- remaining amount being primarily focused on expanding and improving our plant technologies. Beginning this year in 2023, the company is returning to a more normalized cycle of capital spending of approximately $15 million to $20 million a year, which we expect will continue for the next several years. With the reduction in capital spending and a focused effort on improving working capital, we are projecting the company to generate significant free cash flow beginning in the back half of the current year, with approximately $25 million to $35 million of free cash flow generation this year and approximately $200 million over the next 3 years, which equals approximately $3 per share annual return. Our ability to generate this consistent free cash flow will allow the company to quickly deleverage our balance sheet over the next 18 months and continue to execute on our capital strategy of organic growth, strategic acquisitions and opportunistic stock repurchases. Certainly an important factor when we talk about free cash flow is managing working capital. Certainly, the pandemic set us back on that progression slightly due to longer supplier lead times, availability of products, erratic customer production schedules and a movement within our own customer base to try to extend their payment terms. Today, with our internal supply chain stabilize and greater availability of product inputs, we have been able to make great strides in reducing our days forward coverage and thereby improving our inventory turns from approximately 6.5x at the beginning of this year to 8x by the end of the year with a goal of 10x by the end of 2026. We have and we will continue to utilize customer supply chain financing when appropriate, to improve our days sales outstanding as well as the utilization of corporate credit programs to further extend our days payable outstanding, again, in an effort to achieve our $200 million free cash flow generation in the coming years. While we have remained consistent in the long-term capital allocation strategy that prioritizes organic investments, strategic acquisitions and opportunistic share repurchases, in the near term, our primary focus will be deleveraging our balance sheet as we've added debt recently with the new acquisition. We remain confident that we can delever to 1.5 to 2x leverage within the next 18 months. Again, as I mentioned, we expect capital to continue in that $15 million to $20 million a year range for the next 3 years. Of which $8 million to $10 million will be dedicated for maintenance, $5 million to $7 million per year dedicated to growth in automation and the remaining $2 million to $3 million for the new acquisition, which is also split between maintenance and growth initiatives. Lastly, we will continue to opportunistically repurchase our stock under the company's $25 million share repurchase program with approximately $17 million remaining. Now I'd like to take a moment and pivot and provide some additional insight regarding the company's ESOP and steps we've taken to improve our company float. while continuing to align shareholder and employee interest, the ESOP was established back in 1985 after the exit of the company's founder, Ted Bachhuber. Over time and due to the company's significant growth, the ESOP repurchase obligation was consuming nearly 70% of the company's annual free cash flow, which ultimately led to our IPO in 2019. At the beginning of this year, we implemented a planned design change to our ESOP with the intent of reducing ESOP ownership and increasing public float. Prior to this change, when an employee retired or left the company, that individual stock balance would be released from the ESOP to the participant over 5 years. But beginning this year, we amended the plan to a 3-year distribution window. This change immediately released approximately 1 million shares from our ESOP, thereby reducing ESOP ownership from 30% to 20%. Going forward, the impact of this change will be far less as our distributions will occur in the normal course with the intent of reducing ESOP ownership over the long term to approximately 10% to 15%. So as we discussed in detail today, the combination of organic market share expansion through new product development, outsourcing and onshoring as well as our continued improvement in plant utilization and MBX program, we will deliver strong 2026 revenues of $750 million to $850 million. Adjusted EBITDA of between $105 million to $135 million or again, 14% to 16% and strong annual free cash flow generation of $65 million to $75 million, which again equates to a $3 per share annual free cash flow. All of which will ultimately provide substantially increased shareholder value and EPS performance. So to summarize and reiterate, we continue to see outsourcing and onshoring opportunities, fueling our organic growth along with substantial cross-selling opportunities we are projecting to realize from our recent acquisition. Through the company's operational and commercial excellence initiatives, we are confident in reaching 14% to 16% adjusted EBITDA margins by 2026. And again, with the completion of our significant CapEx cycle behind us, we will look to leverage these investments to generate significant free cash flows in the years ahead. As a result of the strong free cash flow, we will be able to deleverage our balance sheet in the near term, and we'll deploy excess capital in accordance with our strategy and maximize shareholder value. Thank you. And with that, I will turn it back over to Jag.

Todd, thank you. We have spoken at length about our strategic initiatives and what we hope to accomplish in each segment. We have covered a lot of information in a short amount of time. So I would like to briefly summarize our key takeaways. On the whole, our MBX value creation framework provides a holistic pathway to creating measurable shareholder value through operational excellence, commercial excellence and disciplined capital allocation. Through this framework and the strategic business transformation that it will bring about, we believe MEC will be ideally positioned to reap the benefits of the attractive macro trends that we are seeing in OEM reshoring and energy transition. Combined, we expect to realize our annual revenues to grow at a compounded annual growth rate of 8% to 12% over the next 3 years to your targeted range of $750 million to $850 million before any benefit from future M&A. This growth will be further supported by improved cost absorption that we believe will expand our adjusted EBITDA margins to between 14% and 16% and free cash flow generation of over $3 per share. It is a very exciting time for all of us at MEC. As we look to the opportunities in front of us, and we look forward to keeping all of you appraised of our progress and sharing in our success in the coming years. I know we have covered a lot of ground here, so we will now open the floor for questions. Stefan will be managing the Q&A process, and I invite the rest of my leadership team to take a seat of the panels.

You talked today a lot about energy transition more so than I've heard you discuss in the past. So can you talk about maybe specifically where you are with existing customers in terms of their -- the opportunities that you're seeing and when you expect those to start materializing?

Yes, we have spoken about our customer wins flat in the last couple of quarters. We have won energy transition programs in our customer -- sorry, commercial vehicle end markets, power sports end markets, and we continue to expand those offerings into other end markets. With many of our customers currently transitioning their ICE engine platforms to battery electric platforms, we continue to see opportunities to directly partner with the end customers, OEMs and also with their -- sometimes with their Tier 1 suppliers. They are supplying to them, either battery packs, thermal management systems and applications as such. Ryan, would you like to add anything else?

Yes. I think most of our customers are kind of in a transition to building out full dedicated platforms. And when we talk about the new business development and the growth we can see, a lot of it is tied to regulatory changes, particularly in the commercial truck market and really great time to integrate MSA and the aluminum into the business as well. There's an element of just new products and going through the launch activity, but another element of how do you take these steel parts now and turn those into aluminum. And now we have an avenue to kind of take two directions with that. So I would say it's kind of just getting started. I think the other important thing where -- as we think about energy transition, there's the traditional vehicle side that we've always supported but looking at more of the infrastructure. If it's -- when solar, the overall grid, we see a lot of opportunities starting to come to light there, particularly with the Inflation Reduction Act and some of the activity that's driving.

And not to forget charging stations. If you think about most of the charging stations that are going to be put out there in the next coming years with IRA bill, so funding help. A lot of that have a lot of metal components, and we're best suited to supply to those OEMs, all the components needed to charge up the networks across the country.

Great presentations. There's a lot out of it. I'm going to ask a couple of questions. One, I just want a little more color maybe on the cap usage. You talked about the fact that you're going to try to -- you're bringing 24/7 production capabilities into Hazel Park. And then that you are going to take the rest of your capacity, which is now running at 55% to 65% and add different shifts and bring them up. Where will you be with regard to the usage of your physical assets when you exit -- when you get into 2026 that you're in plant?

I would say roughly 70% to 75% capacity utilization is what will get us to approximately $800 million of revenues debt. And we will be pretty deliberate about where to add those premium shifts. A third shift on a Sunday night is going to get expensive. But at the same time, right, do we have the demand? What sort of products are we making? What sort of machining centers or lasers or particular automation we need to run. So all of that is critically being planned. And as we see opportunities, we will ramp up our off-shift activity. Ryan, anything you want to add?

Yes, exactly right. I would say 70%, especially on our major assets, right? So when you're looking at our tube lasers, our flat lasers, our robotic brakes and brakes and welding, things like that. There might be some small tertiary pieces of equipment that we need as we get into more specific part numbers. But we're in really good shape to be about 70% by the end of that growth cycle.

So when you get to that level, you put a lot of automation in place and it was pretty interesting to see what happened with your head count as you've done that. How does that play out with regard to your head count? Because in one level, you're increasing productivity, you're adding shifts. But at the other side of the equation is you're putting more automation into your factories and getting more productivity per person, which is more important. But kind of if you think about it in 2026, how do you see your head count playing out?

As we think about our MBX implementation and more rigorous implementation as we get our feet wet here. Labor productivity and cost productivity will become a really important and critical initiatives for us to drive forward in the next 3 years. So we do expect to continue to drive additional labor productivity. And that will obviously means that we need less number of head count in the future as we continue to grow.

The great thing about having a guy like Ryan [ selling ] so much is that as we become more efficient, that labor becomes available for growth. So they're excited about it, too, because they know that they're creating growth. And then the other thing, too, is the level of the job. When you're talking about lasers and robots, you get to develop your people for something that they're very excited about. So we have a lot of systems going on inside to help prepare people for that advancement in technology, and that's exciting for the whole labor force.

I've got 2 more questions. And then just shifting over to MSA. When you made the acquisition, I think you said you were running about 70% capacity and that you expected to be able to fill that 30% capacity relatively quickly. So actually, I'm going to combine both questions. So one is a key part of filling that capacity was getting some certifications in place. So maybe an update in terms of when you expect those certifications to come into play. And then secondly, you also -- kind of where is that capacity now. You've announced that you've picked up some new business and where do you expect that capacity use to be, say, at the end of '24 and then at '26.

Yes. So we're still around 70% capacity. And as we mentioned, we just won that program. That program itself won't go into production until sometime in early 2024. So we're going to be around 70% at the end of this year in terms of utilization at MSA. We expect that by end of 2026, we will reach full capacity to approximately $100 million to $110 million of revenues at MSA with existing assets at MSA. And most of that new growth, we expect to come from commercial vehicles and power sports and end markets as such.

Larry De, William Blair. First question, just a follow-up on the earlier question on charging stations. Are you doing charging stations now? Or are you having discussions? And what's your visibility on that?

We are not in production with any of the charging station customers. That's an active pursuit.

And the increase in sales and margins at '26. How linear is that? Or is it half -- back-half loaded? Or any kind of color on that rollout?

Yes. I would say is, 2024 everyone is calling for a recession, right? Well, everyone called for recession in '23 that didn't really materialize. So we're in uncertain times. But assuming that there is a softening of demand in 2024, as we discussed, right, commercial vehicles will be down in 2024. So outside of that natural macro softness in 2024, '25, '26 should be reasonably linear. So we're not backing a huge hockey stick, but rather taking into account some softness in 2024 and then a reasonable growth in remaining 2 years.

One additional comment I would follow up there. I mean first and foremost, we're not providing '24 guidance at this point. But as Jag mentioned, CV Market is expected to soften next year. And a lot of the product launches that we talked about really don't come on, on board and fully utilized until early '24 and even sometimes mid to late 2024. And then when you think about this facility, Hazel Park, we're going to be ramping up, we're doing what you'll see today. We're doing a lot of activities to get ready for next year. But that sales ramp-up will happen throughout the year and some of the projects that Ryan had mentioned earlier, it won't come online really until the later in '24. So that's going to be a little -- not as much of a drag, obviously, as it was this year, it'll be more of a breakeven, let's call it, next year. So as you look at '25 and '26, that's when we start to see, I think, a little more margin progression. Certainly, we expect this year to be better -- or next year to be better than this year. But if you look at the top line, it probably is lower under that scale and then it kind of accelerating in '25 and '26.

Okay. Very helpful. And then the new sort of pricing initiatives you're talking about. First of all, how customers reacted? I assume you've started to implement some. And in the outlook, what's kind of the price versus volume? I know you have a price bucket in there, but also you have new wins. And just as we see that 12% CAGR, what's the price volume on that? And are you doing -- how different is what you're doing now, if you are to start to implement it? And how is the reaction so far?

Look, turn to...

Yes. I mean I think we spent the last few years talking about material and inflation primarily. So just to kind of reiterate a couple of points. We have our material pass-through agreements, which are kind of price-cost match whereas material fluctuates in the market. That's contractually passed along to customers. Then we've got the second element. I think you were talking about, Larry, of kind of the commercial activity, the value activity typically done on an annual basis. I mean they're defluent in the times of inflation, full understanding. For us that let us put some foundations in place with MBX, so our work over the last 6 to 9 months has been then getting a structural process to not just pass through inflation, but to actually -- what's the value created on that individual part. What is our margins on that part and then providing the appropriate data to have a transparent discussion with our customers is, I think, the key. We do work with big, sophisticated guys and just proving that we're the right guys for them. And then the third element of that too, is kind of the -- when I talked about cost to serve and how we evaluate new opportunities. Repositioning from a cost-plus business into really getting more intelligence around who's the customer, what's the type of opportunity, what's the complexity of the product? Does it launch next month? Does it launch in 18 months? And how do we get more sophisticated kind of building up? So over time, as we transition things end of life, the model changeover events, we would expect to be in a greater position both from revenue and share but also from overall profitability.

So I guess my own personal conclusion is that as I was looking through the slides and listening to your presentations is that when we're kind of looking at the margin bridge, for instance, where wage inflation and pricing are offsetting each other. All the other buckets in one form or another, I can [ time ] back to growth. If you're going to grow, then that margin [ will not ] makes sense. So the linchpin here is really organic growth in this entire plan. And I guess the question would be this, when you're targeting double-digit organic growth over the next few years. If I look at backwards looking now, last 4, 5 years on average, you grew a little over 4% organically. Now you're saying you're going to grow 10%. How is this not -- pretty significantly?

So let me take all. To get to -- I'm going to get to the midpoint of the range, right, to get to $800 million, we have less than $70 million of new business to go win over the next 3 years. Rest is in the backlog, 1 already, right? That's number one. Number two.

Can you be specific in terms of what gives you the visibility to be able to sort of make that statement?

Sure. Yes, go ahead.

Let me add a couple of comments here. And when he's talking about both business, we've received purchase orders, we've built tools. We went through PPAP qualification activity where that's MEC's business. So I think trying to answer your question here, too, what's different today than what was different even a year or 2 years ago specifically is the plant you're sitting in today, right? We weren't able to aggressively attack the market to expand before we had Hazel Park. Certainly, MBX is going to drive productivity throughout the rest of the MEC network that inherently now we can grow those plants revenues, but Hazel Park opened up some excellent opportunities through all of our customers. I think we've been asked who are we going to serve here before. We'll have all the majors in construction, ag, commercial vehicle, the engine example that we gave here today. So as we brought this online, I wouldn't say people just lined up at the door, but to some effect, especially with tightness of capacity the last few years, we've seen just a bunch of requests not only from our current customers but also other new customers. So I -- personally, I'm really confident because we have a wonderful plant to sell here that you guys will see today and that it's just closing the balance of the business like Jag mentioned over the next couple of years.

Yes, some of the large programs, [ Mig ], the light commercial truck program, which is talked about, right? That's going to be approximately 1/3 of volume in this plant. That's one. And I don't know if we'll walk to the exact location, we're actually installing machines right now as we speak. The program will take off in Q4 of 2024, right? So that's a 20 -- it's about $20 million -- that's almost a $30 million revenue program, just one program, right? We have multiple programs like that, that are booked, and we haven't seen any revenues in 2022 or 2023, but we'll begin to see the revenues in 2024 right? So that's what gives us confidence that we have the book business that we're launching right now. And as I said, to get to $800 million, approximately $70 million-ish need to be sold, right? So -- and we are averaging approximately $80-ish million of wins a year -- last 2 years. This year, we expect to win another approximately $80 million of revenues -- sorry, new bookings. So with an average $80 million of bookings and even if you expect approximately 5% of our revenues sort of turnover on an annual basis, right? And that's one of the bridges, right? So that means programs and right there are some business we walk away from. Even with all of that, what keeps me at night is not whether I'm going to hit the top line revenue. What keeps me at night is how can we execute -- turn that revenue dollars into EPS dollars, right? How are we going to be able to execute, right? Can we actually hit the EPS numbers. That's what we're all focused on. This entire team is focused on execution because we know that we have the business -- most of the business in hand, and then we can continue to go and get more business with the showcase facilities such as Hazel Park. Every time we bring customers here, it's an impressive set of assets that we have that we were unable to do. If you all recall, when I first joined last year, and my second earnings call. After my first 100 days, I talked about, right, our sales team was not selling because we were "sold out", right? We're no longer sold out. We just said that we're approximately 50-ish percent sold out, right? So we sort of opened up our own mindset in terms of 24/7 operations, in terms of new capacity at Hazel Park. All of this gave our team confidence in the past year to go and aggressively sell more programs. And then we won those programs and knowing that, now we have capacity, now customers are willing to give us more business. Before they were concerned that we were sold out right? So now we're proving to them with our MBX initiatives that we're opening up additional capacity. We have constant conversations with our customers on what new programs they want to bring in, how they're consolidating their supplier base. So every single one of our major programs -- sorry, major customers have come back in the last 6 months and then said they want to give us more business, right? So that's why Rand and his team are working really aggressively to open up the third shift and fourth shift, that means weekend shifts. And that's where we're going to get our additional growth in the future.

Understood. And then I guess my follow-up is sort of a conceptual question here. Recognizing your comments on the macro being uncertain and all of that, we can all relate to that. But if indeed, we are seeing a little more downside in 2024 like ag OEMs potentially cutting production. You already talked about commercial vehicles. There might be some other corners of the market softening as well. How are you planning on managing your business when the plan here is very much sort of geared for growth? Do you sort of kind of deal with the temporary cyclical contraction and continue to sort of invest for growth, add head count, do all the things you need to do that way? Or is it sort of a temporary cyclical pivot [ defend ] margin, that sort of mentality only to kind of reignite sort of the growth trajectory in '25, '26 and so on?

If it is, the level of softness we just talked about in commercial vehicles, right? That's an incredibly manageable demand condition for us because we're still ramping up production here. But more importantly, we still have a lot of job openings. We're doing a lot of overtime. We're averaging approximately 20% over time across our network today as we sit here, right? So labor is still constrained in many of our markets. So we're driving additional overtime. So that's an immediate lever we can pull to cut back on over time. So we can pull the lever to cut back on weekend work which is premium labor again, right? So we have multiple levers. And on a capital basis, where we can immediately cut back on our capital spend as well. So going into 2024, we're walking -- we will walk into 2024 with open eyes that if this is the level of contraction we're expecting, we'll be in a pretty stable environment where we have new program wins we're ramping up, right? So we will continue to drive the new ramp-up of new program wins. Even when the power sports market or CV market are -- the markets are down, if you saw one of the slides that we put out, right, our arrows are in a different direction than where the market is going to be. That's because of the new program. So we feel pretty good about our levers going into 2024. And with the humility and understanding that we don't know what the 2024 is really going to hold for us. But we have the backup plan to pull the levers as needed to adjust our labor and workforce to handle the demand conditions.

If you don't mind, I'll add one other thing, here in Hazel Park in particular. In the presentation, we talked about all the new SKUs we've put in place, right? So even if those markets are trending in a different direction, those are new SKUs. So by the very nature of us launching these parts this year and those volumes kicking in next year, those are incremental. So there are going to be an add regardless of where the markets are going after those brand new SKUs that we're launching this year.

[Operator Instructions] I will go ahead and take a question that we have online from Tim Moore with EF Hutton. He says thanks for your impressive 2026 targets for adjusted EBITDA margin and free cash flow. Can you elaborate more on running MEC now as one company instead of disparate companies? And then also for Hazel Park, the wins and sales funnel, can you talk about how much of the $100 million sales run rate for late 2024. How much of that is from battery thermal management? And what the $30 million of products that are being transferred there are comprised of from an end market perspective?

I'll take the one MEC question and we'll turn to Ryan for some details on Hazel Park funnel. One MEC, we -- as I was settling into the role last year, it was pretty apparent that MEC was operating in lots of silos. Silos based on past acquisitions, silos based on systems such as ERP systems, silos based on functions. So it was pretty apparent that at the end of the year for the leadership team to pull our next layer of leaders. A good 40 of us went to an off-site last -- this January and pulled together, how do we make the company work like a single company? We were cutting to the same supplier, multiple POs. We're dealing with the same customer with multiple salespeople, right? All of that was apparent that we're not working very efficiently as one company. So in the last 6 months, we have made a significant change and significant transformation. We aligned functionally. Rand made changes in his function -- Ryan made changes in his function so that we're one face to our customers so that [ Deere ] has one person to talk to, right? Other customers have one person to talk to whether it is from a plant side or from a commercial site. Finance, similarly, Todd made changes so that we can work more efficiently. All of this has really helped us come together as one company. So the tagline one MEC, one mission is truly how we're operating. And it's also a rallying cry. Occasionally, teams will get into a meeting and they're having this argument so they're having this conversation and somebody will say, "Hey, guys, let's think about one MEC right?" That has become a really powerful way for us to come together as one company. So with that, let me turn it to Ryan to provide some color on Hazel Park funnels.

Yes. I think we had in the presentation today, kind of a $75 million number that we were tracking to -- of that, about $45 million being new business. And then as we think about that next step then to achieve the $100 million. The balance of that would be new business there. So I'll take that slide and then also as we talk about the $60 million to $80 million of the alternative energy. I would say roughly in Hazel Park, approximately $30 million when we think about a few specific customers will be related to what we would call that energy transition. All that said, Larry asked the question at the beginning of what are you -- do you have a customer in charging stations? We've got active quotes. I've talked to numerous charging station guys. We've got folks in Mayville, work around quotations right now. We've got some solar activity going on now as well, again, the IRAs spring something. So the prospects are strong. We would probably think around $30 million or so that would be here at Hazel Park once we hit our $100 million target.

And then specifically on thermal management opportunities as EVs continue to take hold. We're working with a couple of the suppliers that have the thermal management systems, that have the battery systems. So we're supplying components and parts to those suppliers who in turn then supply into the EV platforms of the world. So that's a significant win for us. Ryan briefly talked about that particular customer. I mean that could be -- they're actually picking up and outsourcing their entire production line to us. So outsourcing has been a significant growth opportunity for us as customers. Think about their capital deployment, their resource optimization. Do they want to make these components or do they want to dedicate their engineering resources, production resources from their capital to new R&D investments, right? So that's really where we're stepping in with our breadth of our capabilities and our depth of our expertise in the industry. And our footprint right is really helping us to walk into our customers and then say, "Mr. Customer, just let us take out the entire production line, and then we'll take it over and then do it for you." And those opportunities are coming into the floor more and more as we sit here.

John Rudolf, Glacier Peak. So you're talking about transitioning in your footprint and everything. When I always look at the map, I see it's concentrated and is looking like an 1850s map of the U.S., I don't see anything out in the West or in the South, particularly. And this kind of ties into -- is there any economies of scale in terms of some of the growth areas. You're obviously very aware of all the energy transition, the solar, et cetera, et cetera. How does that kind of fit in? And two, I've always been surprised how small your defense business is, which is obviously a growth industry and is going to remain that. Well, maybe you want to comment a little bit on that.

Let me take the defense first and then we'll comment on the footprint. Defense, we have a couple of significant customer relationships we have shown on the -- on one of our slides, we're on the JLTV program, and we're on the Humvee program at present. So as the Ukraine war has accelerated the demand for those types of vehicles, we have seen significant uptick in our military revenues this year. It's only 5%, at least 2022 revenues were only 5% of our total revenues of the military segment, but that's growing double digit this year. We don't expect that to grow any further than that, maybe a slight uptick later this year -- sorry, for 2023 rather. But in terms of military, we don't have any other plans to expand our offerings into other programs at this point. It doesn't mean that we won't get into other programs. As the JLTV transitions from the current supplier to the new supplier, who happens to be the Humvee supplier. We also have relationship obviously with other supplier, we expect to pick up incrementally more revenues as that transition happens sometime in the 2024, 2025 time frame. We're actively working with that supplier as well. Our side of the defense question you had, John. Our footprint is the way it is because of all the acquisitions the company has made over the past number of decades. But also, it serves us really well because most of our current customers are very close to our footprint. As you walk out there today, you will see some of the parts we make, some of the systems we make for -- subassemblies we make for our customers. They're incredibly heavy and large. So shipping becomes a significant cost, logistics become a significant cost for many of our products and our customers. So there's a reason for the footprint that we have and how it actually serves a majority of our customers. Having said that, if the next acquisition is somewhere on the West Coast or the South or the East Coast, right, that aligns truly with our lightweighting initiatives and then energy transition initiatives, right? We will go acquire that company, and then we won't be limited to just the middle of the country, right? So right now, where we are, that's where we are, and it helps us really well. But as we look to the future, it's possible that we could expand into the rest of the country.

So I've got one or 2 more. I see you brought your legal team here as well as human resources. So maybe you could comment at some point on the whole labor situation. How stable is that? And back on the legal side, I guess, if I'd been coming here 2 years ago, I would have thought we'd all be on bicycles, working out during this meeting. But could you give us a little insight on that? Where does that stand in terms of some sort of legal settlement that eventually will get reach of some kind. Is any of that in these free cash flow numbers or any other balance sheet?

Yes. So let me address all of that. So we're excited to have both Rachele and Sean, part of this team, right. So as I started last year and started thinking about capabilities for our leadership team to double our size in the coming years, right? It was very obvious that we needed to buffer our leadership team with additional skills and capabilities. So we're excited to have Rachele leading our HR team, and we're excited to have Sean leading our -- not only corporate development processes, but also as our General Counsel. So first, I'm going to turn it over to Rachele to address the labor question and then we'll come back and address the former customer.

Well, before I dive into the specific labor question, I guess I'll just share with this whole group, why I joined MEC. I was looking for a company that had the kind of strategic growth plan that MEC has. I want to be part of an organization that's going to grow and really where I could have an impact on that growth. I had an opportunity to transform HR at previous organization. And I saw that I could come and be part of this organization and help it transform as we look to achieve our growth goals. I'm excited to be here. As it relates to labor, we have actually seen things come down a bit. We still have places where we have opportunities. You have to look at each individual market and understand what's happening in each market. And so we put in incentive programs. We look at how we want to attract. We look at how we want to retain and we look how we want to develop talent across the organization, but we need to understand individual markets. So right now, I can overall say we're happy with the trend we're seeing, but we still need to stay close to it. Yes, we actually have frequent meetings where -- actually weekly meetings where we make sure that we're staying on top of the needs. And because of this fact that we have this overtime, how are we handling that? What does that look like? And we really do monitor that. It's exciting to see the stabilization but you've got to stay on it.

And just to add to that, just on the professional side as well, right, the labor markets have been tight and being in Mayville with our headquarters, it's not an easy place to attract folks to -- professionals to commute an hour each way from any major metro center in Wisconsin. So we have announced publicly now, right? Now we are moving our headquarters from Mayville, Wisconsin to Milwaukee. And that's in the public domain now, and we signed a contract, and we will be most likely moving sometime in January into new headquarters for some of the Milwaukee folks at the Honey Creek Corporate Center.

Changing the name to Milwaukee Engineering...

We are changing our name to MEC Inc. So with that, before I turn it over to Sean, we're excited to have someone of his capability and skill set to join MEC, right? Sean has over 20-plus years, 25 years of M&A experience. He led the corporate development team at Caterpillar and also is a trained attorney. So let me turn over to Sean to share some of his thoughts also on what's going on with our former customer.

Great. Thanks so much, Jag. It's a pleasure to meet you all for those of you whom I haven't had a chance to meet. I'm Sean Leuba, as Jag mentioned. And I've been at MEC since January. I joined as the General Counsel and Head of Corp Dev. Former role, as Jag mentioned, was Head of Corporate Development for Caterpillar Inc. I spent 24 years there. And while CAT is a great company, and I really enjoyed my time there. I accomplished what I wanted to achieve while I was at CAT and mutual acquaintance introduced Jag and I last year. And I had the opportunity to hear all the exciting things that he had planned for MEC and the fact that he needed a General Counsel and someone in Corp Dev, we continued our discussions and fortunately, I was able to fulfill both roles. And we hit the ground running in January, and we're able to get MSA completed on July 1. In regard to the litigation that's ongoing with our former fitness customer, I can't offer too much because it is ongoing litigation, but discovery is ongoing. We expect that to complete by fourth quarter of this year. We do remain optimistic for a favorable outcome but beyond that, I can't provide a whole lot more comment on the ongoing litigation. Although Todd, I will turn it back to you to follow up a question on whether any settlement is included in the free cash flow.

No, that's not being factored in when we think that would be accretive incremental to what we've already shown. So there is nothing reflected for the former fitness customer on any settlement.

Can you give any guidance as to the range of numbers of lower to higher? But where are you at that you could publicly comment in terms of?

Our current litigation, we're asking the New York State Supreme Court Commercial division, our legal claim is for $107 million.

And do they have a counterclaim going on or...

No.

All right. Real fast. We'll take another question from the virtual audience. So you've invested over $30 million in technology over the last 4 years. How do you feel -- is that adequate? And how are you thinking about investment in technology? What are your guiding principles and objectives over the next 3 years as you think about technology investment?

Yes. Thank you for the question. When I was joining the company last year, I was pleasantly surprised how forward thinking the company and the leadership team and the Board was in supporting significant capital investments over the past 4 years. We spent, including Hazel Park, the tooling and startup, almost $100 million in capital over the last -- that period. Last year alone, in 2022, we spent $50 million of total capital expenses for the company. So what did we get for that, right? What we got for that is some of the best technology, cutting-edge technology, in lasers, in press brakes, in machine tools, in welding so that we can be extremely competitive in offering our customers the best-in-class solutions. The $30 million that we had in one of our slides relates specifically to robots and automation. That's helping us reduce our head count from 3,100 employees in 2019 to under 2,600, including MSA. That's almost 250 employees came from MSA. So 3,100 to 2,400 employees at base MEC right? That's what we got for the $30 million. Having said that, as we look to the future, our goal is to stay with about $15 million to $20 million of annualized capital expenses. That CapEx, we only need about $8 million to $10 million of CapEx for maintenance and repair and replacement, right? The rest of the CapEx is going to be directed towards automation and continuous upgrade of our older equipment across the network. So with that, we're thinking about smart and advanced manufacturing opportunities, sensoring and other sort of technologies that can get us to take all these islands of automation, if you will, right, and then pull it all together and continue to help us improve our productivity.

Any other questions from the audience?

[ Joe Mervar Ancora. ] My question kind of touches on pricing in the competitive environment. And it's also a hypothetical question. I'm a customer, let's say, $30 million, $35 million. I'm entering negotiations with you in the next couple of years contract. You want to hit me with a 5% or 6% price increase. I know I can pull fabrication in-house, but I can't beat you on a per price or per piece basis because of overhead and all the CapEx. So under competitive environment who else out there in the fabrication industry today can take on or within 6 months can take on a $30 million, $35 million customer. And kind of secondarily, how hard can you push the pricing envelope because of the competitive environment?

Yes. I mean as I said in the remarks, a highly fragmented market. I think there's a lot of mom-and-pop shops out there. They certainly couldn't step into a $30 million program which I think is where we really shine. So the battery thermal management solution Jag talked about earlier, we talked about in the presentation is just that. They needed a very strategic partner to step in and support a major launch, having capacity, I think, is job won, but don't underestimate the engineering depth and breadth we have as a company, I think as things progress over time, the baby boomer engineers retire. There's a lot more reliance on the suppliers to support design, design for manufacturability, how do you bring things to market, how do you do it effectively. So I think -- as we think about the revenue side, we're definitely in a good position to win these major programs just because of our balance sheet and just the scale. And as we think about pricing for us, if it was a new one, we'd want to get it right the first time. But as we go back and look at kind of our base business, it's stuff like that, that we're thinking about. Who is really our competition? When you get into that $30 million to $35 million program, the space starts to tighten up really quick. And we're kind of putting new filters on the bottom end of our business as well to say we don't need to grow $20,000 at a time. We want to grow by $5 million, $10 million, $20 million, $30 million at a time and really kind of getting that upper echelon of supporting outsourcing from customers, factories and things like that. So again, we feel good about the systems we put in place, either how we generate quotations, how we get the market intelligence, how we evaluate complexity and alternatives to really put the right price out there from the beginning.

All right. One additional question from the virtual audience. You've obviously given some pretty comprehensive set of targets for 2026. As you think about these 3-year targets, what -- how are you thinking about potential sources of upside to them? And what gives you the confidence in achievability of these?

So I think we have appropriately risk adjusted our opportunities given some uncertainties in the market in the near term. So is there upside to the $750 million to $850 million? If there is, right, we'll see how that plays out in the future, but we feel pretty confident about the range we just laid out, is that $750 million to $850 million. What gives us confidence, I'll say earlier answer, our pipeline of projects and we look at our win rates, we can -- we have a pretty good sales management, sales funnel management process. And we can look back our approximately -- how many bids do we win on an ongoing basis based on different end segments and customers, et cetera. So we have a pretty good idea of how much -- how big our funnel has to be to close the gap to the range we just laid out, right? So that gives me confidence, number one. Number two, given that significant portion of that future growth has been won and booked and we're in the middle of tooling to take those products to market. That gives me even further confidence that -- no, we can hit our revenue targets we just laid out.

Perfect. Thanks, Jag, for that answer. With -- if there's any more questions in the room or online. Otherwise, we'll wrap it up and proceed to the plant tour for those in person.

Thank you all for your questions. And I'm really looking forward to showing all of you our fantastic Hazel Park facilities and the capabilities that we have built for our customers.

Excellent. Thank you.