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

Thank you. Hello everyone, thank you for joining us and welcome to the 2026 second quarter Mayville Engineering Company earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star to raise your hand. To withdraw your question, press star 1 again. will now hand the conference over to Stefan Neely with Valum Advisors. Please go ahead.

Thank you, operator. On behalf of our entire team, I'd like to welcome you to our second quarter 2026 results conference call. Leading the call today is MEC's President and CEO, Jack Reddy, and Rachelle Lair, 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. is 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 our closest GAAP financial measure is included in our quarterly earnings press release, which is available at meckinc.com. our prepared remarks we will open the line for questions. With that I would like to turn the call over to Jack.

Thank you, Stephan, and good morning, everyone. Our second quarter results reflect stronger than expected demand across several key end markets. This was highlighted by continued momentum in data center and critical power on the early recovery underway in our commercial vehicle market. As a result, top line performance exceeded our expectations and positions as well as we entered the second half of the year. Throughout the quarter, our execution remains strong as we ramped activity across numerous data center and critical power programs while continuing to invest in the people and equipment needed to support future demand. These investments are to expand the capacity required to support long-term profitable growth. As anticipated, higher volumes drove improved operating leverage sequentially during the quarter. As we move quickly to capture a rapidly expanding data center and critical power opportunity pipeline, we are incurring incremental operating costs ahead of the associated revenue. This reflects two deliberate timing related investments. First, the capacity and equipment we're putting in place to ensure effective program launches. Second, the incremental cost of outsourcing certain elements of the fabrication process to third parties as equipment constraints in our existing facilities currently limit our ability to perform this work in-house. We have ordered the equipment needed to bring this work in-house, though it carries a four to six-month lead time. We expect launch costs to continue through the second half of the year as we support customers' aggressive program timelines. These investments are front-loaded by design and reflect both the natural cost of scaling at pace and the opportunity for profitable growth that we see ahead. Importantly, we continue to view these costs as temporary, and we expect them to subside as we bring our newly hired workforce up to full productivity and complete our targeted capacity investments. These programs are building toward a meaningful step up in margins over time. As these investments come online, production volumes ramp, and utilization improves, we expect strong incremental margins to materialize. Simply put, the programs we are launching today are accretive to the long-term margin profile of the business, and the investments we're making now unlock that expansion in the future. A significant milestone during the quarter was the successful completion of our common stock offering, which generated approximately $94 million in net proceeds. The offering advances our capital allocation priorities by strengthening the balance sheet and enhancing the enhancing financial flexibility. We use the proceeds to reduce debt, exiting the quarter with more than $100 million of available liquidity. With a stronger balance sheet and increased liquidity, we are well positioned to fund strategic growth initiatives and capitalize on the significant opportunities developing within the data center and the critical power market. Equally important was the timing of the offering. To demand accelerating beyond what operating cash flow alone could prudently fund, securing capital now gives us the flexibility to invest ahead of demand rather than react to it. This provides us with the financial foundation to pursue profitable growth opportunities with confidence. As we deploy this capital, we will remain disciplined, prioritizing higher value, higher margin opportunities that we believe will generate the strongest returns and create lasting value for our shareholders. Moving to some of our key end markets. Commercial vehicle net sales increased approximately 3% year over year in the second quarter as North American Class 8 production began to recover. Customer bill rates have continued to accelerate, and we expect this dynamic to continue into the second half of this year. In its most recent report, ACT's full-year 2026 outlook projects a 9.1% increase in Class 8 production, supported by a projected 45% increase in production throughout the remainder of the year. This outlook reflects a continued up cycle in order activity and leads to a projected 9.7% increase in 2027. Given that our demand activity typically precedes class 8 production by approximately 6 weeks, we are encouraged by the activity levels we are seeing today. In construction and access, revenue increased approximately 15% year over year in the quarter as performance was supported by strength in non-residential activity. In power sports, net sales decreased approximately 6% year over year, driven primarily by softness in legacy ATV, UTV, and motorcycle OEMs, resulting from ongoing offshoring initiatives. With the data center and critical power, we delivered organic growth of approximately 173% year over year. supported by growth from existing OEM customers and project launches tied to AccuFab-related cross-selling opportunities. Demand in this end market remains robust with our qualified opportunity pipeline continuing to exceed $125 million. The value of projects scheduled to launch in 2026 is approximately $50 million to $60 million. including the growth from our existing OEM customers, data center and critical power is expected to represent approximately 20% of total revenue in 2026. As demand for these higher value programs accelerates, we are making disciplined portfolio decisions across the business. This includes actively evaluating pricing and margin profiles across our portfolio on a case-by-case basis. This may result in changes to mix our capacity allocation over time. These dynamics are unfolding against a backdrop of limited manufacturing capacity across the U.S., increasing the value of reliable domestic supply. In response, we are evaluating opportunities for customers to reserve dedicated capacity with us. For customers, this provides greater certainty of supply. For MEC, it creates more predictable revenue and supports margin expansion by directing capacity towards our highest value programs. We will continue to manage capacity and production priorities carefully to support sustainable, diversified and profitable growth over the long term. Before turning to capital allocation, I would like to highlight a few examples of the commercial momentum we are seeing across the business. During the second quarter, we secured approximately $40 million in new awards with data center and critical power customers. While these awards are not expected to contribute materially in the near term, they provide strong visibility into the future with production launches and revenue generation anticipated to begin during 2027. Based on current visibility, we expect total 2026 bookings across all of our end markets to exceed $150 million, supported by sustained demand and an improving cyclical backdrop. Within our legacy end markets, we continue to expand our share with key commercial vehicle customers as they prepare for upcoming product launches tied to the 2027 EPA regulation changes. These programs are expected to begin entering production in in late 2026. Beyond commercial vehicle, we secured business through new model introductions for an access customer, while also capturing additional service business supporting a military customer. In data center and critical power, the approximately 40 million million in awards secured during the quarter reflect both new business and continued expansion with major customers. These programs include power distribution units, switchgear, and static transfer switches. turning to capital allocation in more detail. With our balance sheet significantly strengthened, our focus is centered on three priorities. investing in organic growth, continuing to reduce leverage, and pursuing selective accretive acquisitions. First, organic growth. Customer demand is increasingly outpacing our current available capacity, and our organic investments are aimed squarely at unlocking more of it. Over the next two years, we expect to invest an incremental $50 million to expand capacity and support the growing needs of our data center and critical power customers. These investments include targeted upgrades across our existing manufacturing footprint, customer supported program investments, and the development and equipping of a new production facility. Together, these initiatives are expected to increase our revenue capacity beyond the approximately $850 million we have discussed previously with room to build from there over time. Rochelle will discuss in greater detail later on the written criteria we apply to these capital investments. Second, deleveraging. As production volumes increase and profitability improves, we expect earnings growth and cash generation to become increasingly important drivers of leverage reduction. long-term net leverage target remains 2.5 times, and the actions we took this quarter represent a meaningful step toward achieving this objective. Third, accretive M&A. We will remain opportunistic pursuing acquisitions that strengthen our competitive position, expand capacity, and support long-term value creation. With the With conditions improving across our legacy and markets, accelerating momentum in data center and critical power, and a significantly stronger balance sheet, we are well positioned to deliver profitable growth and create lasting shareholder value. We believe we are entering a transformative chapter defined by expanding capacity, capacity, accelerating growth, improving profitability and rising returns on invested capital. investments we are making, today our building is stronger, more competitive company, and positioning us for meaningful value creation in the years ahead. With that, I would like to turn the call over to Rochelle.

Thank you, Jag, and good morning, everyone. Total sales for the second quarter increased 23.2% on a year-over-year basis to $163 million. Excluding the impact of the ACUFAB acquisition, organic net sales increased by 9.2% compared to the prior year period. Our manufacturing margin was 10.9% for the second quarter of 2026 compared to 10.3% for the prior year period. The increase in our manufacturing margin was due to higher margin sales contribution from the ACUFAB acquisition and improved capacity utilization as the commercial vehicle and construction access end markets started to recover. This was partially offset by $2.1 million of data center and critical power related project launch costs. Whether selling general and administrative expenses or 9.3M dollars, or 5.7% of net sales for the 2nd quarter of 2026 as compared to 10.3M dollars or 7.8% of net sales for the same prior year period. The decrease in these expenses primarily relates to non-recurring executive transition expenses and ACCU-FAB related acquisition costs in the prior year period. This is partially offset by incremental SG&A expenses associated with the acquisition. Adjusted EBITDA margin was 8.1% for the quarter, compared to 10.3% in the prior year period. The decrease reflects $2.1 million of project launch costs and higher gain sharing accruals due to the current company performance and the expansion of our workforce. partially offset by the benefit of the ACUFAB acquisition and higher legacy and market volumes. As Jake mentioned, our project launch costs in data center and critical power came in slightly above our expectations to meet our customers program timelines while equipment constraints in our existing facilities limit our in-house capacity. We expect to recognize an additional $2 million to $3 million of outsourcing costs in the second half of the year. As activity accelerates, programs reach full production, and targeted capital investments are deployed, we expect these costs to normalize and to realize operating leverage across our footprint, position us to ramp new programs in the pipeline more efficiently, and supporting the margin expansion we expect over time. Interest expense was $3.5 million for the second quarter of 2026 as compared to $1.4 million in the prior year period. The increase was driven by increased average borrowings and interest rate under the company's revolving credit facility and the timing of debt repayment. As a reminder, the proceeds from our May equity offering were used to reduce debt during the quarter. However, under the terms of our credit agreement, the resulting step down in our borrowing rate will not take effect until August. Turning now to our cash flow and the balance sheet. Free cash flow during the second quarter of 2026 was a use of $6.6 million as compared to $12.5 million provided in the prior year period. The year-over-year decrease was primarily driven by lower operating cash flow, reflecting reduced profitability, and working capital investments to support the launch of data center and critical power programs. Capital expenditures also increased by $5.6 million, driven primarily by equipment investments supporting the launch of new programs. At the end of the second quarter, our net debt was $134.7 million, up from $71.8 million at the end of the second quarter of 2025. Our debt resulted in our bank covenant net leverage ratio of 2.9 times as of June 30th. Now, turning to a review of our outlook for the third quarter and the full year. For the third quarter of 2026, we currently expect net sales for the quarter of between $160 million and $170 million. adjusted EBITDA of between $15.5 million to $18.5 million. Our third quarter outlook reflects continued recovery within our commercial vehicle and construction access end markets, along with the ongoing ramp of the data center and critical power programs. Our outlook also includes $1 million to $1.5 million in launch-related costs in addition to $1 million to $1.5 million in outsourcing costs. For the full year, we increased our financial guidance for net sales and lowered our free cash flow guidance. We now expect net sales of between $620 million and $650 million. We still expect adjusted EBITDA of between $52 million and $60 million and free cash flow of between $7 million and $15 million. This outlook reflects a full year of AccuFab ownership, $50 million to $60 million of incremental cross-selling revenue, and continued improvement in legacy end-market demand as commercial vehicle recovers and construction access continues to deliver steady performance. Additionally, our full-year outlook includes $5 million to $6 million in launch-related costs and $2 million to $3 million in outsourcing costs. We'd also like to provide some additional detail on our capital allocation plans. As Jag mentioned, we expect to invest approximately $40 million of incremental capital expenditures in the business over the next two years, along with an additional $10 million of leased equipment, which will be reflected in financing cash flow. Our updated full year 2026 guidance includes approximately $25 million of this planned investment, with the balance occurring primarily in 2027 and to the lesser extent in 2028. Separately, these amounts do not include any investment in a new manufacturing facility. We are actively evaluating several in the southeastern United States and believe an investment of this type would likely fall in the $25 million to $30 million range and support approximately $50 million to $60 million of incremental revenue. We are generally targeting a decision in late 2026 and will provide updates as our plans take shape. Underpinning these plans is a disciplined approach to capital deployment. We are carefully matching our organic growth investment to customer demand and hold new capital to clear return thresholds, targeting a payback period of two to three years and an internal rate of return of at least 15%. In summary, our second quarter results reflect strong top-line performance that came in well above our expectations. While launch and outsourcing costs are impacting near-term profitability, these investments are supporting programs that will contribute sustainable future revenue and earnings growth. As we move through the second half of the year, our focus remains on successfully scaling data center and critical power programs. improving operational efficiency, and converting the commercial pipeline in front of us into profitable growth. With a stronger balance sheet, ample liquidity, and a disciplined investment framework, we believe we are well positioned to capitalize on the demand environment ahead and continue to create long-term value for shareholders. With that, operator, we are ready to open the line for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. To ask additional questions, you may re-enter the queue. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, Press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question from the line of Mike Schliske with DA Davidson. Mike, your line is open. Please go ahead.

Yes, good morning and thanks for taking my questions here. I wanted to ask a question, too, to follow up, Jag, on your comments about customers being able to potentially reserve some capacity in future periods. Just want to get a little bit more detail there. Was that a data center only comment or is that across most urban markets? And does this mean that they have to give a deposit to reserve that space or, and or do you think there would be kind of like a, you know, like a reserve of take or pay contract or will it be just having space for a small fee and you can figure out the exact quantities and amounts later?.

Hey, good morning, Mike. Good question. We are exploring various options. particularly with data center customers, where there is an increasing need for capacity and there is a constraint in the US manufacturing space to accommodate all the demand that we're seeing and they're seeing in the data center build out And so we have had multiple conversations with many of our data center customers, and they were exploring different models. We put together a upfront fee structure. We have also discussed volume commitments and we continue to explore these options, even though we have not signed any particular customer to a contract like that, there is interest and we continue to explore those options with our data center customers.

Great. And then as a follow-up, I wanted to just ask for a little more detail on your truck-related as well. Does the relatively quick ramp up in trucks, does that change any of your capacity plans for data centers or any of the other groups, or is that still going to run in its own area? I guess you can comment also on whether along the way as the truck market ramps up, if you had any interesting new business wins the last quarter or so.

Absolutely. We continue to see a significant ramp in commercial vehicle building. build-out rates. Our understanding currently is that most of the 2026 build slots have been filled and the customers are just beginning to open up their 2027 build slots. That is certainly a faster uptick than we have anticipated in Q1 and we continue to support our customers, all three major customers we currently work with. as they increase their build outs and build rates. At the same time, we continue to see good market share gains, particularly related to 2027 EPA emissions change. we talked about in our prepared remarks, a couple of wins in the commercial vehicle space and we continue to see good activity with the OEMs that are introducing new models going into 2027 in the previous quarters we talked about our significant wins for the model truck, particularly a couple of the customers. And those programs continue to be on track with revenue potentially showing up in late Q4. Certainly the ramp for those vehicle programs will be in 2027.

Okay, great. Thanks for the time. I'll pass it along.

Your next question from the line of Vlad Bystrycki with Citigroup. Vlad, your line is now open. Please go ahead. Good morning, Jack and Rochelle.

I'm going to call here. I just wanted to ask you about, when I think about the revenues and adjusted EBITDA range for 3Q and the back half of this year, Can you just talk about the puts and takes at the low end versus the high ends of the outlook and whether the ranges are more dependent on sort of customer experience? CUSTOMER TIMING OR UNCERTAINTY OR MORE SO AROUND YOUR ABILITY CUSTOMER TIMING OR UNCERTAINTY OR MORE SO AROUND YOUR ABILITY TO CONTINUE RAMPING ON.

volumes and deliveries? Thanks, Lad. Yes, I think as we as we talk about it, the primary variables as we look at the low end and the high end are the truly the pace of the CV recovery. We are seeing as Jag mentioned a lot of increase there, but how fast does that That's a piece that will impact whether we're at the lower the high. The timing and execution of DCP volume. So we're continuing to see the volume, but this market is continuing to evolve and change. And so sometimes customers are pushing things out, pulling things forward. So that could impact it. And then how quickly can we get through these launch and outsourcing? The outsourcing costs are highly related to when we get our capital equipment purchases. And so the sooner those come in and the sooner we can get those up to speed, the sooner we'll be able to then reduce those costs. So those are kind of the three factors that put us on different ends of the range.

Got it. That's really helpful. Appreciate the color, Rochelle. And then just as a follow-up, can you... Can you give us some color on the nature of the DCP program awards that you've been winning over the past year or so? Are these mainly additional programs for existing customers? Are you seeing new customer wins and then And just to follow up to that, can you, as you think about the incremental BCP cross-selling revenue on slide 11, SHOULD WE THINK ABOUT THE LEVEL OF CERTAINTY AROUND THOSE REVENUES OR ANY RISKS AROUND GENERATING THOSE SALES IN THE TIME FRAMES NOTED ON THE SLIDE?.

Yes, Vlad, the wins in the DCP and market are both existing customers increasing volumes of existing ACCUFAB programs. It's new programs from existing DCP customers and and multiple new customers that we have been able to bring online since the transaction closed in July of last year. So we have added significant number of new customer programs to the mix since the closing of AccuFab acquisition. We talked about as an example one particular customer that that is new to MAC and ACUFAB that have so far awarded a little over $55 million worth of programs to the You know just this year alone and they continue to look at additional programs. to award to to Mac, right? So that is, I would say that probably out of the 90 million of bookings that we've had in the two quarters this year, easily that's 55 million of that is just from one brand new customer that came online after the acquisition closed. At the same time, 135 million of bookings we have had since the transaction closed, you know, are a mix of new programs from existing customers and, you know, a new, volume increases from existing programs that we picked up with acquisition. And from a timing perspective, you know, we feel. really good about the timing of these incremental cross selling revenues that we have laid out on slide 11. And we see a line of sight to certainly right in 2026 revenue. And then we also see good progress towards the 27 revenues. I appreciate all the color, Jack.

Your next question from the line of Greg Palm with Craig Hallam. Greg, your line is now open. Please go ahead.

Thanks. Good morning. I wanted to, yes, good morning, Jag and Rochelle. I wanted to follow up on the capacity reservations that you talked about. In terms of like background, are these requests coming directly from customers and how did these conversations even start? And to be clear, are they solely with your existing customer base or are you having these conversations.

with companies that you aren't yet doing business with? I would say most of these conversations are with both existing and new customers in the DCP market space, Greg, as I mentioned earlier, that is a new business model that we're exploring. And in our legacy end markets, whether it's construction, or CV, or ag, that is not a framework that those customers are used to. And even though we have had preliminary conversations with legacy customers, but we're already on contract for those volumes, we already won those programs, and it's a little bit challenging to go back to those customers. Certainly the new customers who are bringing on, those are the conversations we're having. And I'll also throw in the mix. as we are working on our Southeast facility identification, That's another opportunity for us to put in front of the DCP customers to say, look, at some point we will have a new facility in the Southeast and here's your opportunity to reserve some capacity. So I would say that's another interesting opening for us to pursue that framework.

And I guess given this dynamic, are you changing at all how you're looking at newer business opportunities in the pipeline? Are you becoming more selective to hold some of these potential spots for larger capacity reservations?.

We are. I would say that as much as our sales team hits it, right? We have had to say no to some small programs. We have had to say no to some opportunities, because we are right now, in the next 12 months as we project out our capacity utilization, as we project out where we will be by mid to late next year, already making some calls on which programs to walk away from, which programs we need to exit, right? So that's it. It's a lot of analysis and a lot of internal conversations that we're having. But yes, we're having to make some choices. And my expectation is that those choices will help us in the long run to improve our mix, improve our profitability, and continue to push up. our expectations for our margin profile. Okay, thanks.

Your next question from the line of Ross Sparenbleck with William Blair. Ross, your line is now open. Please go ahead.

Hey, good morning. Morning, Rob. Hey, sticking to the new wind here. Can you maybe just give us a sense of how the mix of revenue is expected to change over time as we think about maybe bespoke programs versus these higher quality long longer term programs that you're selectively bidding on? Yes.

We are certainly prioritizing volume increases from existing programs. What I mean by that is if a DCP customer needs, currently has a program that we're building in one of our plans, and we have seen occasions where they would come in and then say, I want to double my volumes. I want to triple my volumes. I want to quadruple my volumes. Those programs obviously get a higher priority because it's the product line that we know well. and processes have been set up and it's easier to scale those programs were prioritized out those at the same time, right? If we're adding. CapEx, new incremental costs, we're going back to them to raise our prices even for those existing programs. That will push our mix and margin up. for the future. At the same time, we are looking at where can I exhaust my open capacity? So our tube plants in Michigan, particularly one plant and potentially a second plant, to take on fabrication of DCP products. This is, I would say, a very challenging switch over, but the team has done a phenomenal job in converting one of our tube plants to a into a fab plant and that has opened up significant opportunities for us to take on DCP product lines. That would be our second opportunity. Again, you know, we talked about power sports customers offshoring many of our programs, even though that's a headwind in the short term, we're looking to take that capacity, convert that to DCP as well. So that's a second priority that we're, you know, we're driving. And then the last but not least scale. If we're going to take on a ten, $20 million program, we would prioritize that versus, you know, multiple two to $3 million program. So that's how we're trying to scale up and mix up for the future.

Yes, that's helpful. And that's kind of what I'm trying to assess here. There's inherent cyclicality in some of your in markets. You can't really fix that, but you're going back and you're repricing an existing business because of the level of demand. So I was trying to, how should we think about the contribution of kind of higher quality, longer term, like recurring revenue, just the stability of the portfolio outside of just, honestly, we're going to have more DCs, maybe some more defense, um, just generally speaking, like, is it kind of 30% heading to 20% that's like bespoke kind.

a one-off, set or cyclical? Right. And it's not a good number, it's fine.

Yes, in the past Ross know we talked about reducing our. Overall, CV mix to just under 25%. I think we're making good progress, not by exiting CV programs, but by increasing our exposure to DCP programs. So that's number one. we see a line of sight to 20% revenue mix of DCP product lines by end of this year, even though we're not laying out any long-term targets for our DCP mix, I could see in the long run somewhere between 25 to 30% of total revenues. Make revenues exposed to DCP because we do think that it's a three to five At least you know from what we can assess. So those are the two drivers. I would say that you know reduce. a lower margin end market exposure and increase a higher margin.

from DCP exposure in the long run. Okay, I understood. And then maybe just one more really quick on that new facility coming online. Forgive me, but did you guys give a kind of a sense of the size there on square footage as we think about the revenue runway you gave us?.