Mayville Engineering Company, Inc. ($MEC)

Hello, everyone. Thank you for joining us, and welcome to the Mayville Engineering Company First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Stefan Neely with Vallum Advisors. Please go ahead.

Thank you, operator. On behalf of our entire team, I'd like to welcome you to our first quarter 2026 results conference call. Leading the call today is MEC's President and CEO, Jag Reddy; and Rachele Lehr, Chief Financial Officer. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.

Thank you, Stefan, and good morning, everyone. Our first quarter results exceeded our expectations, driven by strong top line momentum in our Datacenter and Critical Power end market. At the same time, the first quarter reflected an ongoing transition across the business. Our teams remained focused on positioning resources, completing tooling requirements and preparing for the launch of numerous Datacenter and Critical Power programs throughout 2026. During this transition, we continue to incur and retain variable costs as we position the business for successful program execution. As a result, our margins remained pressured during the first quarter. That said, performance improved late in the quarter as several Datacenter and Critical Power programs transitioned from the launch phase into full production. We expect that momentum to continue building through the second quarter, which reinforces our confidence in the sequential improvement reflected in our financial guidance. While many of our Datacenter and Critical Power programs have yet to launch or are still in the early stages of ramp, execution to date has been strong. This reflects the upfront time, planning and resources we have invested to ensure a smooth and repeatable onboarding process across our legacy manufacturing footprint. As additional programs enter production, we are seeing consistent improvement in operating leverage and fixed cost absorption, driven by better asset utilization across our manufacturing network. Importantly, the strength we are seeing in Datacenter and Critical Power continues to contrast with mixed conditions across our legacy end markets. While each market has its own dynamics, we have not yet seen clear indications of a broad-based or material recovery in legacy customer demand. Starting with commercial vehicles, demand continued to soften in the first quarter. Net sales declined approximately 24% year-over-year as North American Class 8 production reached a low point in the current cycle. In its most recent report, ACT again revised its full year 2026 outlook upward, now projecting a 9.2% increase in Class 8 production. This improved outlook reflects greater clarity around the 2027 EPA emission standards, anticipated prebuy activity and strong Class 8 orders earlier in the year. That said, current OEM production levels remained largely consistent over the past 6 months and do not yet indicate a meaningful cyclical recovery. Combined with elevated fuel costs and recent tariff policy changes, our near-term view of this market remains cautious, pending a material improvement in OEM activity. In Construction and Access, revenue increased approximately 3% year-over-year in the quarter, which was ahead of our expectations. Performance was supported by continued strength in nonresidential activity, although demand remains more customer-specific than broad-based. In Powersports, net sales increased approximately 5% year-over-year, driven primarily by incremental volumes from discrete short-cycle customer programs. This was partially offset by continued softness among legacy ATV, UTV and motorcycle OEMs as well as lower sales within the marine propulsion market. Within Datacenter and Critical Power, we delivered organic growth of approximately 71% year-over-year, supported by growth from legacy OEM customers and early project launches tied to Accu-Fab related cross-selling opportunities. Overall, demand from OEM customers in the Datacenter and Critical Power market remains strong. Our qualified opportunity pipeline exceeds $125 million and the value of projects scheduled to launch in 2026 is approximately $50 million to $60 million. Combined with continued growth from our legacy OEM customers, we continue to expect Datacenter and Critical Power to represent more than 20% of our revenue in 2026. Customer demand in this end market remains robust, and we continue to evaluate the right approach to balancing the needs of our legacy customers while meeting accelerating demand in this rapidly evolving space. As datacenter infrastructure advances, customers are increasingly seeking adaptable solutions that are addressing their evolving needs and enabling faster speed to market. These shifts are redefining how customers approach large-scale deployments and their selection of partners. As we move into the second half of the year and with the potential for recovery across certain legacy end markets, we are actively managing capacity and prioritization to support long-term diversified and profitable growth. Before turning the call over to Rachele, I want to highlight several areas of commercial momentum that reinforce our confidence in the growth trajectory for 2026 and beyond. Across all of our end markets, customer engagement and bidding activity remains strong. During the first quarter, we secured approximately $50 million in new project awards with data center and critical power customers. This amount surpasses the total awards we secured in this end market during the second half of last year. For the full year 2026, we currently expect total bookings across all of our end markets to exceed $150 million, supporting profitable growth as our legacy markets move toward a cyclical recovery exiting 2026. Within our legacy end markets, share gains continued with commercial vehicle customers as they launch new products ahead of the 2027 EPA regulation changes. These awards support future growth and are expected to enter production in late 2026 and 2027. In addition, new contract wins supporting legacy military vehicle platforms were secured during the quarter. This provides stability to our core base military revenues. Within the Datacenter and Critical Power market, the approximately $50 million of awards secured in the first quarter were primarily driven by demand from new customers in this end market. As these customers scale their programs, the intent is to serve as a long-term strategic metal fabrication partner. The awarded scopes of work span power distribution units, static transfer switches and switchgear. Turning to capital allocation. Our priorities are disciplined and well balanced. In the near term, we are deploying capital in a targeted manner to support existing project commitments and the evolving needs of our Datacenter and Critical Power OEM customers, including investments in equipment and capacity. At the same time, we remain focused on prudent balance sheet management and reducing debt. Longer term, the focus remains on strengthening the balance sheet and maintaining sustainable financial flexibility. Our long-term net leverage target remains 2.5x, and we expect to make steady progress towards this objective through earnings growth, consistent cash generation and disciplined capital deployment. Importantly, the demand environment in Datacenter and Critical Power is creating a meaningful opportunity to invest organically in the business and expand our capacity. In certain areas, customer demand is already exceeding our current available capacity, and we believe targeted investments in equipment, automation and operating capabilities can deliver attractive returns while enhancing our ability to serve this fast-growing end market. Although we're still assessing the full scope of this opportunity and the related capital requirements, we expect growth capital investment to increase above the $5 million to $10 million level we have historically averaged. In 2026, that investment will remain focused on supporting current program launches and selectively adding capacity where visibility, customer demand and return thresholds are strongest. Over time, we believe this market may support a broader and highly attractive organic investment opportunity. As always, we will pursue that opportunity within a disciplined capital allocation framework, balancing growth investment with deleveraging, cash flow generation and balance sheet optionality. In closing, I am encouraged by the discipline and execution our team has demonstrated so far this year. As we navigate this next phase of growth, our focus is on prioritizing operational agility, efficient program execution and improved cash flow conversion as volumes ramp. We believe that consistent, disciplined execution over the coming quarters will position MEC to deliver stronger operating performance and create a solid foundation for sustainable growth. With that, I would like to turn the call over to Rachele.

Thank you, Jag, and good morning, everyone. Total sales for the first quarter increased 6.8% on a year-over-year basis to $144.8 million. Excluding the impact of the Accu-Fab acquisition, organic net sales declined by 8.2% compared to the prior year period. Our manufacturing margin was 7.6% for the first quarter of 2026 compared to 11.3% for the prior year period. The decrease in our manufacturing margin was due to $1.2 million of Datacenter and Critical Power related project launch costs, nonrecurring restructuring costs and lower volumes in our legacy end markets. These factors were partially offset by the higher margin sales contribution from the Accu-Fab acquisition. Other selling, general and administrative expenses were $9.2 million or 6.3% of net sales for the first quarter of 2026 as compared to $8.7 million or 6.4% of net sales for the same prior year period. The increase in these expenses primarily reflects incremental SG&A expense associated with the Accu-Fab acquisition. Interest expense was $3.7 million for the first quarter of 2026 as compared to $1.6 million in the prior year period. The increase was driven by higher borrowings resulting from the Accu-Fab acquisition, which was completed during the third quarter of last year. Adjusted EBITDA margin was 4.5% for the quarter compared to 9% in the prior year period. The decrease reflects lower legacy end market volumes and $1.2 million of project launch costs, partially offset by the benefit of the Accu-Fab acquisition. During the quarter, we also continued to execute our previously announced footprint optimization actions, including the consolidation of 4 warehouse locations and 1 manufacturing facility. We expect these actions to generate annualized savings of approximately $1 million to $2 million and are already contemplated within our full year outlook. Turning now to our cash flow and the balance sheet. Free cash flow during the first quarter of 2026 was a use of $6.9 million as compared to $5.4 million provided in the prior year period. The year-over-year decrease was primarily driven by lower operating cash flow as a result of reduced profitability, together with a $1.2 million increase in capital expenditures. The increase in capital spending was primarily related to equipment investments supporting the launch of the new data center and critical power programs. At the end of the first quarter, our net debt was $219.2 million, up from $80.4 million at the end of the first quarter of 2025. Our increased debt resulted in our bank covenant net leverage ratio of 4.4x as of March 31. Now turning to a review of our outlook for the second quarter and the full year. For the second quarter of 2026, we currently expect net sales for the quarter of between $145 million and $155 million and adjusted EBITDA of between $10 million to $13 million. Our second quarter outlook reflects continued launch-related costs and margin pressure early in the quarter with improvement expected as the quarter progresses and additional Datacenter and Critical Power programs move into full production. For the full year, we refined our financial guidance by raising the low end of our previously announced guidance while maintaining the high end of the range. We now expect net sales of between $590 million and $620 million, adjusted EBITDA of between $52 million and $60 million and free cash flow of between $25 million and $35 million. This outlook reflects a full year of Accu-Fab ownership, $50 million to $60 million of incremental cross-selling revenue and a gradual improvement in legacy end market demand, primarily in the second half of the year. In summary, our first quarter results were consistent with the operating conditions we outlined coming into the year. While profitability and cash flow were affected by launch-related costs and continued softness in legacy markets, those pressures are temporary and remain embedded within our outlook. As production levels increase and utilization improves, we expect better absorption, stronger margin conversion and improved cash generation over the remainder of the year. With continued working capital discipline and targeted capital spending, we believe we are positioned to support growth while also making measurable progress on deleveraging. With that, operator, we are ready to open the line for questions.

Your first question comes from the line of Mike Shlisky with D.A. Davidson.

I wanted to ask maybe a 2-part question about the non-data center end markets and legacy end markets here and your commentary in the slides. The Ag market, you were saying it was going to be down like mid-teens and now you're saying it's flat. And so my question -- and you didn't change the comments that most of your outlook feels like 2027 is the time when heavy Ag will come back, but there might be some lighter Ag doing better here in 2026. But I guess, is that -- was that change in outlook from down mid-teens to flat due to how you feel about the very end of the year and what OEMs are telling you about ramping up for 2027, asking suppliers like maybe to build stuff in late 2026. I guess that's the first part of the question. And then the Construction and Access side, I've sensed so far this earnings season that most construction companies, including the largest ones, are taking their outlooks up, most of the construction equipment OEMs. You took your outlook here down from last quarter. So again, I'm curious whether there's some kind of year-end and estimate to slow down in advance of some challenges they might be seeing in 2027. Just maybe some more detail about both those end markets would be appreciated.

Yes. First of all, Mike, on the Ag market, we are seeing good strength in the Small Ag turf care segment. We're approximately 45%, 55% mix between Large Ag and Small Ag. So the Small Ag and the turf care segment strength obviously is offsetting the declines in the Large Ag segment, and that's the reason for our change in our outlook for the Ag segment. And then on to the Construction and Access. Again, as you recall, we're approximately 45%, 55% heavy construction versus access. Our heavy construction segment continues to show a good amount of strength driven by nonresidential ag demand, some of it driven by datacenter build-out as well. But then the Access segment, we anticipated coming out of last quarter earnings call, Access segment to accelerate this year. So far, we have not seen that. So hence, our change in our assumptions for the Construction and Access segment to be flat versus slightly up.

Okay. Okay. Turning to datacenter. I'd like to maybe get a feel for some more detail as to how you're looking to accommodate some of the demand that's been rolling in with some of the quoting that you've been doing. Because I think, first half, you mentioned you actually elsewhere in the business closed some footprint. So I want to make sure you've got a plan. Do you plan to open a brand-new footprint at this point given the demand? Or are you still looking to convert existing buildings to datacenter? Just some more detail as to how this will play out and the investments that you're making now, are those in people or in machines to accommodate some of that near-term demand?

Let me address that, Mike. We announced the closure of 4 locations. Those are mostly warehouses that we consolidated into our manufacturing sites. That was the restructuring we announced last year, the second half, and then we just wrapped those up. We -- we're not in process of closing any manufacturing footprint, number one. Number two, we have converted approximately 6 going potentially a seventh plant as well to datacenter manufacturing. So we're retooling between 6 and 7 plants as we speak here to produce datacenter products. We continue to add capital as needed in these 7 locations to offset existing manufacturing assets to continue to take on additional datacenter volumes. We do see significant growth in the datacenter volumes. Every quarter, as you all have seen, we continue to step up our cross-selling synergies. Pre-acquisition closing, we were in the single digits. Now we're up to $50 million to $60 million of cross-selling synergies in 2026 alone. I continue to be very bullish on datacenter volumes. At the same time, we have not exited any of our legacy customer programs. We continue to be able to support at this point, our legacy customers with their volumes. As we talk about multiple end markets, we really haven't seen broad-based recovery in our legacy end markets. So certainly, right, at this stage, we're able to support our legacy customers as they continue to ramp and also take on incremental datacenter volumes in these 7 locations.

Great. Maybe one last one for me. A lot of headlines and stories about changes in the Section 232 tariffs and cost of steel and other metals. I was wondering if you can maybe outline how any of this might be impacting you directly and maybe just over the last few months. Are you guys a beneficiary since you're almost entirely U.S.-based? And are you seeing some customers old and new coming to you to say, how can you help us to best structure ourselves for these tariffs?

Yes. 100% of our steel is procured from domestic sources. That way, we have been reasonably insulated from supply challenges. We pass on any increases in steel prices to our customers. So I would say that it hasn't impacted us. At the same time, approximately 30% to 40% of our aluminum is imported from Canada. And then we're trying to mitigate that, but it is challenging. So rest of our aluminum is sourced domestically. So we're able to support many of our aluminum customers with their demand and needs. We are seeing some challenges where some of our customers are going on allocation with other suppliers on aluminum. So fortunately, we're in a good position to continue to support our customers as their demand increases or they switch from another supplier that is unable to procure aluminum to MEC. So those have been positive. In general, on 232 impact, I would say that we have not been either positively or negatively impacted. You have seen some of our customers and their competitors publicly talk about 232 impacts. But so far, I would say that, that has not really impacted MEC.

Your next question comes from the line of Ross Sparenblek with William Blair.

Sounds like you guys have been busy with the problems you have here. Maybe just starting with the new customer wins, continued momentum in datacenters in the first quarter. Anything onetime in nature to call out? Or I mean, are you sensing that customer buying patterns have started to change here within the datacenters and power market?

Yes. In the datacenter -- yes, good question, Ross. In the datacenter market, some of the significant wins we had in Q1 actually came from 2 brand-new customers to MEC and Accu-Fab. We never did business pre-Accu-Fab days. So those 2 customers significantly contributed to the wins in Q1. We expect those 2 customers, in particular, to continue to grow with us as the year progresses and into the future. What we are seeing is a significant switch in our data center OEM customer behavior, purchasing behavior, where similar to our legacy end markets, many of these customers are looking to completely outsource fabrication, step up their manufacturing process to someone like MEC. If you think about our legacy customers in ag or construction or CV over the decades, they exited fab operations to suppliers like MEC. We're seeing a similar process happening slowly, but steadily in the Datacenter and Critical Power customers. And we see that as a long-term secular tailwind for the fabrication industry. And being the largest fabricator in North America, we are able to offer significant capacity to these OEMs, and we're able to capture a significant portion of the outsourcing that is starting in this industry, right? So all of those are positive tailwinds for the industry and for MEC going into the future.

No, that's great to hear. And then just staying on that topic, when we think about all the larger potential OEM customers out there within data centers, can you just give us a sense of where your kind of penetration rate is as we think about the pipeline of opportunities and who you're speaking with?

I mean our penetration at this point, Ross, and take the top 10 potential customers or existing customers is low single digits or less, right? We're sub-5% penetration. And hence, my optimism for the industry and for our customers is that as we go into even rest of this year or second half, right, we continue to get significant inquiries. We continue to qualify these opportunities even after raising our cross-selling synergies for the year, right? Our qualified pipeline remains really, really strong and gives me a lot of comfort that this is a multiyear secular growth opportunity for MEC.

Yes. I mean just expanding on that, I mean, it sounds like the whole market is heading for a capacity squeeze. So I mean we just kind of take out the increased allocation for DC customers if the broader end markets start to recover here, I mean, how do you feel like you guys are positioned to handle legacy customers?

That's a great question. Our intent at this point is to continue to serve our long-standing legacy customers as they build out their volumes into the second half and into 2027. We're constantly evaluating plant by plant, manufacturing -- operation by manufacturing operation and continuing to see where we have to offset some capital to increase capacity. So some of my comments in our prepared remarks allude to the fact that we're looking at potentially in the long run, a significant organic investment opportunity as we think about expanding capacity for datacenter customers while continuing to serve our legacy customers.

Would that imply the optionality at Hazel Park? I believe you guys still have that additional square footage.

Absolutely. And I can tell you that, that's been a long time coming, the Hazel Park story. We just put approximately $55 million worth of datacenter products into Hazel Park in Q2 -- Q1, Q2. We're ramping approximately $55 million worth of datacenter products in Hazel Park. And we think we can fill up Hazel Park. And we always said that the current space we have, not the sublease space, the current space we have supports $100 million worth of capacity. We do need some capital assets to continue to go in because the mix of operations for datacenters is slightly different than our legacy customer products. So with all of that, we continue to be bullish on Hazel Park being filled up in the next year or so.

Your next question comes from the line of Greg Palm with Craig-Hallum.

Can you maybe talk about how some of these early launches in data center critical power are going just in light of the comments last quarter. It seems like everything is on track and you're starting to see the margin improvements. But just kind of curious what else is kind of top of mind as we obviously launch more of these projects this quarter and in the second half?

Yes. As we pointed out in the prepared remarks is we invested in these product launch costs. And we spent about $1.2 million in Q1, $1.2 million in Q4, and those are just to be ahead of these launches. We see that continuing into Q2. But then after that, as we're hitting full run rate production levels, we're seeing improvement. And in fact, in Q1, as we are exiting in the quarter, we saw that improvement happen as we had several programs hit that full production run rate. So very optimistic about the fact that we made those investments, did the right thing to make sure that we're creating an effective onboarding program so that as we do new programs, as we do new launches, we know what the upfront investment is. And then we hit that full run rate production levels, we're back to the margin levels of the overall end market.

Okay. Understood. And as we think about -- I appreciate the commentary on the new customer side in terms of what you're winning on data centers. But if we could go back to kind of the existing customers, I'm kind of curious what you're seeing in terms of like order progression from them in terms of how much bigger are the orders getting because they're outsourcing more business to you or they're winning a lot more business themselves? Like it kind of feels like you're not only going to have this big ramp of orders from your existing customer base, but you're also going to be now layering on brand-new customers as well, which presumably would follow some similar path of accelerated activity as well. So maybe you can just kind of walk us through those dynamics.

Let me clarify, Greg, you were asking all of this in the context of datacenter customers, existing datacenter customers versus new?

Yes. Yes. Correct.

Yes, that's absolutely right. As we bring on -- as I mentioned, right, we brought on 2 brand-new customers to MEC since the acquisition closed. We expect a couple more brand-new customers that are in the works to become our customers later this year. Outside of those brand-new logos, as we internally call it, coming to MEC, Accu-Fab's legacy datacenter customers continue to ramp significantly. That's also been another tailwind for us. I shared some examples in the past about volumes doubling, tripling, quadrupling on products that Accu-Fab historically manufactured for some of these customers as they win significant new projects and significant volumes for their own product lines. And hence, what the legacy Accu-Fab customers are doing is looking at their own footprint, their own resources and making choices around outsourcing additional work to suppliers like MEC, right? So there is new customer growth. There is existing customer volume growth. And then there is an existing customer market penetration or market share gains, right? So that's how I would position the growth we're seeing in this end market.

Okay. Makes sense. And I want to follow up on a comment you made in response to an earlier question, Jag. I think talking about Hazel Park, I think you said that you could actually generate $100 million out of that facility. I think you were specifically saying as it related to datacenter. Is that correct?

No, that's the total capacity historically -- Hazel Park being a $100 million plant. As I just said, we put $55 million worth of datacenter work into that plant. We still have another $15 million to $20 million of other legacy customer work in that plant today. And you can do the math and then say, can I put another $20 million to $25 million of datacenter work into Hazel Park? Absolutely. So that's what we're trying.

Okay. Makes sense. And I guess just last question to me is I'm thinking about the full year guide and backing into the second half, it implies an EBITDA run rate on a quarterly basis that's pretty close to $20 million. And I'm just asking in light of sort of early thoughts on next year, but I mean, we're already going to be at low double-digit margins in the second half of this year, if that's the case. I assume next year as volumes recover further as mix gets more positive from data centers, that would probably support even higher margins, but I just wanted to ask the question because it's a pretty big step-up in both absolute EBITDA and margins that is being considered for the second half of this year.

Yes. So when you look at our legacy business, you can look back to 2024 when we were hitting roughly $600 million in that base business alone. Our margins were at that point well in excess of where we're at today. And so we're on our way towards that 15% plus that we'd like to be long term. You throw in 20% plus and the Datacenter and Critical Power, which is 20% margins. And yes, we do see a clear path to that 15% plus as we move into the future.

[Operator Instructions] Your next question comes from Ted Jackson with Northland Securities.

Congrats on the quarter. So my first question, I want to just touch on the second quarter guidance. You're looking for a midpoint of $150 million. It's comfortably above, I'd call it, the consensus view. The legacy markets themselves, at least in the first part of this year are -- let's just say they're underperforming with a better outlook maybe in some of them as you get to the second half. To hit the midpoint of that, I mean, that would tell me that perhaps you're going to see maybe even more business coming out of the datacenter power side of things than perhaps you thought going into the year. Is there -- do you see that, that business being able to hit your 20% of revenue target in the second quarter alone?

In the second quarter alone. No, I think we want to still really look at that as being second half of the year that it's really going to hit those levels and actually almost outperform at that point. But in Q2, it's really going to be launching the program still, and we probably won't hit full run production rates until late in Q2. So really second half focus still for the Datacenter and Critical Power being at full production run rates.

And what is the full production run rate for Datacenter and Critical Power?

We have always targeted at least publicly commented, Ted, our ambition is to be at 25% of our total volumes to be in Datacenter and Critical Power end market. I do see that target in our reach, certainly on an exit run rate for 2026 and certainly for 2027.

Then shifting back into the second quarter, is there any particular legacy market that you're expecting to have some kind of, I mean, call it, a bulge in terms of ability to generate some revenue that then kind of falls away? I mean, like Powersports comes to mind because you've had some performance there, but you keep highlighting that it's been driven by very project-oriented stuff, and it's not like long tail customer wins. I'm just trying to understand like how to get to that $150 million if it's not coming from a faster ramp in the power and data market than maybe expected?

Yes. We have looked at commercial vehicles ramping starting in May-ish. So May and June could have a slightly higher commercial vehicle run rate as our OEMs ramp. Powersports is probably not the end market that I would expect to help us in Q2. We continue to see significant outsourcing to Asia from our Powersports customers. The discrete programs we talked about were specific aluminum related. As we had the materials and the capacity, we took on some quick run projects that will exit in Q2. So that's not a long-term run rate type of business in Powersports that's going to help us in Q2.

Okay. Okay. I think you've given me what I needed there. Shifting over to capacity. I mean you have one of the better problems that a manufacturing company can have, which is demand that might -- is pushing you to capacity constraints. Given your current footprint and the potential, we'll just call it potential for a lot of your legacy markets to turn around at the same time that this power and datacenter market is coming, how much revenue do you think you could run through your existing footprint? And what does it take to do? I mean, I assume that you're running at like I assume you could add ships and increase capacity that way. I mean maybe just a discussion like at your current level, where could you take your revenue run rate to? And then all else being equal that you have your same footprint, how could you take your revenue higher? What are the steps you would...

Yes. Great question. I will give you a couple of numbers, Ted. As we look at our current capacity and current programs that we have won and potential ramp-up of our legacy customers, we're going to top out with no further investments. We'll probably top out around $850 million in revenue. What that means is we have to continue to invest given the mix differences between datacenter products and our legacy products. We will potentially run out of capacity after the $850 million of revenue. And more importantly, and I've said this in the past, that we probably have to think about an organic investment somewhere on the Eastern Seaboard, where we're currently running out of capacity for datacenter customers. We have capacity in the Midwest, but some of the products we're manufacturing for some of the datacenter customers are large in volume, significantly expensive to ship across the country, so that's something that we're evaluating. We're at the, I would say, early stages of that analysis and to figure out how do we fill existing capacity first. And then what's the time line by which we will run out of our existing capacity and then how do we think about expanding our capacity organically.

And that $850 million run rate, that without further investment, that's running the same shift counts or you're getting thereby -- you're just utilizing your facilities more by adding shifts?

Yes. We're feverishly adding people and shifts to our plants in the last 4, 5 months. Some of our plants are running 7 days a week. Some of our plants are running full 24 hours and 5 days a week. We're running 10% to 12% over time in many of our plants right now and continuing to hire in many of our plants that are seeing volume growth, particularly driven by data center customers.

So Jag, I'm sure every day you come to work, you have a lot of problems that you need to solve, and it's challenging, but it seems like the problems that you're solving are a lot of fun. So I mean it's pretty exciting to see what's there in front of you. And congrats on the results.

Your next question comes from the line of Andrew Kaplowitz with Citibank.

This is Natalia on behalf of Andy Kaplowitz. I think the first question I'll just ask is I'm just curious, as you continue to highlight strong momentum within Datacenter and Critical Power, yet your broader other end market outlook is flat for FY '26. Can you maybe help us unpack what areas within that category are offsetting that Datacenter and Critical Power-related strength? I think you mentioned on your slide, there's like modest activity from those growth initiatives.

Right. As we mentioned earlier, Natalia, ag is flat. Construction Access is flat. Powersports, we actually think will be a headwind for us in the second half and into 2027. Our CV market, we didn't spend a lot of time today talking about our current forecast guidance assumes a $240,000 -- sorry, 240,000 unit build for the year that is higher than what we started the year with, but at the same time, it's lower than what ACP is projecting today. We haven't seen that ramp yet. We're in the window right now. We should see that in May and June and going into Q3 with our CV customers. That's really giving us a bit of a pause in terms of legacy end markets, all in all, while we see strength in our DCP market.

I appreciate that, but I was just curious about your other end markets, like the other end market that you guys have on your slide with flat estimate.

Yes. I think the biggest thing here is as we've been growing in Datacenter and Critical Power, we've really been focused on growth initiatives there. This is some things that come in more as one-off pieces of business or different opportunities. Our extrusion business has a lot in here, but the extrusion business we're winning is actually Datacenter and Critical Power classified. So we're seeing a big piece of what maybe would have been growth in extrusion here in other be extrusion growth in Datacenter and Critical Power.

So some of this is really reclassification from other into datacenter market.

Got it. Makes sense. Much appreciated. And then one last question on my end. We appreciate the long-term growth opportunities in Datacenter and Critical Power. But with margins still under pressure and leverage elevated, what's giving you the confidence that MEC and the business can generate sufficient free cash flow to both delever and continue investing in these growth initiatives?

Yes. We definitely are focused on delevering. That's been something that we have a proven track record of doing as we do acquisitions. There's a little bit of a 12- to 18-month time of absorbing the acquisition and then working to pay that down. What we see as really the true opportunity here is as we move into the second half of this year, and we really have both the strong sales for Datacenter and Critical Power at higher margin plus some expectation of that CV market coming back in the second half that we'll be able to generate some additional cash flow to focus on delevering with the goal of being below that 3x as we exit this year. So very second half weighted. But with what we are seeing with the launch and the confidence that we gained exiting Q1, see those sales coming to fruition and the margin and results associated with it.

We have a follow-up question from Greg Palm with Craig-Hallum.

Yes. I thought this one would have gotten asked. So since I'm back in the queue, I'll ask it now. As it relates to commercial vehicle, I understand and can appreciate your conservatism. Let's just assume hypothetically that the build rate or the production increase ends up being whether it's that 9% rate or something in the high single digits for fiscal '26. Is there a reason why your segment results would deviate significantly from that?

It should not, Greg. So if the market actually builds at that 9-plus percent build rate. But also, let me remind you that the 9% is actually retail sales is how ACT would report, which is pretty close to the bill rates anyway. But let's say that it's approximately 9% build rate, yes, we should see a very similar tailwind for our segment revenue.

Okay. Understood. And I guess since I'm asking questions, I'll ask one more. Going back to datacenters, are you seeing -- like is most of the revenue or awards contracts that you're seeing today more project-based with sort of a definitive time line attached to it? And I'm curious if there's now or if there is like potential discussions to enter into like more long-term frame agreements, sort of multiyear type of sort of capacity expansion, that kind of stuff?

I would say that since the acquisition, a significant portion of our wins have been for long-running products, these customers will continue to offer to various datacenter projects. I can only think of perhaps maybe one program where it was one customer-specific program. It's a small program. But generally speaking, these are long tail long-run product lines is where we're winning. At the same time, we are beginning the conversations with these customers regarding potential capacity reservations, potential long-term agreements, as you mentioned, Greg. So those are the conversations our teams are beginning to have certainly with our DCP customers.

And this concludes today's Q&A session. I will now turn the call back to Jag Reddy for closing remarks.

Before we conclude, I want to again thank our team members for their continued strong focus and execution and our shareholders for their ongoing support. While we recognize the near-term challenges in several of our legacy markets, we are confident in the progress we are making to position MEC for durable high-margin growth in the years ahead. We look forward to sharing our continued progress with you. Thank you for joining us today.

This concludes today's call. Thank you for attending. You may now disconnect.