Earnings call transcript: Mayville Engineering Q4 2024 beats EPS expectations

Mayville Engineering Company (MEC) reported its financial results for the fourth quarter of 2024, revealing a slight beat in earnings per share (EPS) expectations. The company posted an EPS of -$0.07, surpassing the forecast of -$0.08. Revenue, however, fell short of expectations at $121.3 million, compared to the forecasted $124.27 million. Following the announcement, the company’s stock experienced a decline of 1.12%, closing at $13.79. According to InvestingPro analysis, MEC appears slightly undervalued at current levels, with a P/E ratio of 22.2 and a notably strong free cash flow yield of 22%.

Key Takeaways

• EPS slightly exceeded expectations, coming in at -$0.07 against a forecast of -$0.08.
• Revenue fell short of projections, marking an 18.4% year-over-year decline for Q4.
• Stock price dropped by 1.12% in response to the earnings release.
• The company anticipates a demand recovery in the latter half of 2025.
• MEC continues to focus on cost reductions and efficiency improvements.

Company Performance

Mayville Engineering faced a challenging fourth quarter of 2024, with total sales decreasing by 18.4% year-over-year. Despite this, the company managed to slightly surpass EPS expectations. The full-year net sales also saw a decline of 1.2% from 2023, totaling $581.6 million. The manufacturing margin for Q4 dropped significantly to $10.8 million from $18.2 million in the previous year. InvestingPro data reveals a concerning gross profit margin of 13.78%, though the company maintains a healthy current ratio of 1.77, indicating strong short-term liquidity.

Financial Highlights

• Revenue: $121.3 million, down 18.4% year-over-year.
• Full-year net sales: $581.6 million, a 1.2% decrease from 2023.
• Q4 manufacturing margin: $10.8 million, down from $18.2 million last year.
• Free cash flow in Q4: $35.6 million, up from $19.9 million last year.

Earnings vs. Forecast

Mayville Engineering’s actual EPS of -$0.07 beat the forecast of -$0.08, marking a positive surprise for investors. However, the revenue of $121.3 million fell short of the expected $124.27 million. The EPS beat, though minor, reflects the company’s efforts to manage costs and improve efficiencies amidst declining sales.

Market Reaction

Following the earnings announcement, Mayville Engineering’s stock price fell by 1.12%, closing at $13.79. This decline positions the stock near its 52-week low of $12.23, reflecting investor concerns over the revenue miss and overall market conditions. The stock has faced significant pressure, down 25.74% over the past six months. InvestingPro subscribers have access to 12 additional exclusive tips about MEC’s current market position and growth potential, along with comprehensive analysis in the Pro Research Report.

Outlook & Guidance

Looking forward, Mayville Engineering projects net sales for 2025 to be between $560 million and $590 million. The company anticipates adjusted EBITDA to range from $60 million to $66 million, with free cash flow expected between $43 million and $50 million. MEC is optimistic about a demand recovery in the second half of 2025, driven by strategic initiatives and ongoing market share gains. The company’s overall financial health score of 2.74 (rated as "GOOD" by InvestingPro) and Altman Z-Score of 3.31 suggest a stable foundation for future growth.

Executive Commentary

CEO Jack Reddy stated, "We are positioning ourselves to become a leaner, more efficient organization equipped to capitalize on a future demand recovery." CFO Todd Butts added, "Our financial position enables the team to focus on executing our long-term strategy." These comments underscore the company’s commitment to operational efficiency and strategic growth.

Risks and Challenges

• Market Demand: The commercial vehicle market, a significant revenue source, is expected to remain flat or slightly decline in 2025.
• Cost Pressures: Ongoing efforts to reduce costs may face challenges if market conditions do not improve.
• Competitive Landscape: Maintaining market share amidst aggressive competition could impact growth.
• Economic Uncertainty: Macroeconomic factors, including tariffs and supply chain disruptions, pose risks.
• Sector Volatility: Fluctuations in sectors like agriculture and power sports could affect revenue streams.

Q&A

During the earnings call, analysts inquired about the potential benefits of tariffs driving manufacturing back to the US. The company confirmed its ongoing M&A strategy, targeting acquisitions with revenues between $50 million and $150 million. These discussions highlight the company’s proactive approach to navigating market challenges and exploring growth opportunities.

Full transcript - Mayville Engineering Co Inc (MEC) Q4 2024:

Operator: Hello, and welcome everyone to the Mayville Engineering Company Fourth Quarter twenty twenty four Earnings Conference Call. My name is Becky, and I’ll be your operator today. During the presentation, you can register a question by pressing star followed by one on your keypad. If you change your mind, please press star followed by 2.

Jack Reddy, President and CEO, Mayville Engineering Company: I will now hand over to your host, Stefan Neely, with Valham Advisors to begin. Please go ahead.

Stefan Neely, Investor Relations, Valham Advisors: Thank you, operator. On behalf of our entire team, I’d like to welcome you to our fourth quarter and full year twenty twenty four results conference call. Leading the call today is MEC’s President and CEO, Jack Reddy Todd Butts, Chief Financial Officer and Rochelle Loehr, our Chief Human Resources 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 meckinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Chad.

Jack Reddy, President and CEO, Mayville Engineering Company: Thank you, Stefan, and good morning, everyone. During a period of softer demand within our core vertical markets, our team maintained focused execution in 2024. We delivered consistent profitability, disciplined net working capital management and significant year over year growth in free cash flow generation when compared to 2023. Similar to the third quarter, our fourth quarter performance was impacted by lower customer program activity as OEM customers continue to drive normalization in channel inventories. Lower demand contributed to an 18% year over year decline in revenue, which resulted in reduced overhead absorption and lower utilization.

During the first half of twenty twenty five, we anticipate that the ongoing softness in demand will persist across most of our end markets consistent with what we have seen during the second half of twenty twenty four. Based on current customer discussions, together with new projects and backlog, we expect demand conditions to gradually recover during the second half of twenty twenty five. Our business development team is actively engaged in discussions with both new and current customers within high value emerging end markets and particularly those that capture multi year investable themes. These new opportunities, which include exposure to industrial infrastructure investments such as the ongoing domestic data center build out, have the potential to increase our revenue base across growing, less cyclical end markets. Our business continues to generate strong free cash flow, positioning us to execute on our capital allocation strategy that includes continued debt reduction along with opportunistic repurchases of our common stock.

In 2024, we generated free cash flow of nearly $78,000,000 including $25,500,000 from a recently announced legal settlement. Excluding the settlement, organic free cash flow more than doubled versus 2023 levels. During the fourth quarter, we repaid more than $31,000,000 in debt, reducing our net leverage to 1.3 times at year end. This is well below our stated targeted net leverage ratio range of between 1.5x and 2x by the end of twenty twenty four. As we have continued to reduce our net leverage ratio, we have been increasingly committed to a systematic approach to share repurchases under our existing $25,000,000 authorization.

To that end, during the quarter, we repurchased nearly $4,000,000 worth of company common stock. For the full year 2024, we repurchased $5,900,000 of company common stock, partially offsetting the dilution from the shares awarded in 2024 relating to our stock based compensation program. With $19,000,000 remaining under the existing authorization, we will continue to repurchase shares on a regular basis going forward. With respect to commercial growth, our team remains actively engaged in efforts to expand our serviceable market across both new and existing verticals. In 2024, we booked more than $100,000,000 in new business wins, an increase of 12% year over year and remain focused on driving continued order growth across a broad array of end markets over the coming year.

Importantly, even as current demand conditions have evolved, we have had no unexpected customer contract cancellation, a testament to the durability of our customer relationships. Looking ahead, we continue to seek diversification across less cyclical higher value opportunities through a combination of existing business development activities together with targeted inorganic growth. Todd will discuss the outlook in more detail shortly, but I would highlight that our assumption is that entering 2025, customer demand will remain muted as channel inventory destocking continues. While each customer and end market are slightly different, we broadly expect that the inventory destocking trend will be a headwind for year over year growth and margin expansion in the first half of the year. Current expectations are that customer channel inventories will begin to normalize entering the third quarter.

Consequently, we anticipate that we will begin to experience ratable demand improvement during the second half of twenty twenty five relative to the first half. Turning now to a more detailed review of market conditions across our primary end markets. Let’s begin with our commercial vehicle market, which represents approximately 38% of our trailing twelve month revenues. During the fourth quarter, commercial vehicle revenue decreased by 10.5% on a year over year basis. Our net sales to this end market were relatively comparable to the broader commercial vehicle market as evidenced by a reported 10.4% year over year decrease in North American Class eight truck production according to ACT research.

As we look forward into 2025, ACT research currently forecasts that Class eight vehicle production to decrease 4.8% year over year in 2025 to approximately 316,000 units. Strength in vocational truck demand and continued demand in truck orders suggests fleets are preparing for 2027 EPA regulations. These factors are driving demand to modestly increase through most of 2025 prior to a recovery in 2026. The latest forecast shows ACT projecting 2026 full year demand to increase by 11.7% relative to 2025. The power sports market represented approximately 17% of our trailing twelve month revenues and decreased by 29.1% on a year over year basis in the fourth quarter.

Performance during the quarter continues to be driven by customer channel inventory destocking, soft consumer demand due to elevated financing rates and production cuts. This was partially offset by the impact of incremental volumes from new project startups. Given the current market conditions, we anticipate elevated rates will continue to weigh on demand. However, new product launches should provide incremental improvements to our performance. Next is the construction and access market, which represented approximately 16% of our trailing twelve month revenues.

Construction and access revenues decreased 34.5% on a year over year basis in the fourth quarter. This reflects continued soft demand across both non residential and public infrastructure markets. We expect demand to remain soft through the first half of twenty twenty five. Entering the second half of twenty twenty five, we anticipate demand to increase based upon increased activity in public infrastructure and non residential construction. Our agricultural market represented approximately 8% of trailing twelve month revenues and decreased by 46.5% on a year over year basis during the fourth quarter.

Our results reflect weakness in both large and small agricultural markets. The outlook remains uncertain due to interest rates, continued inventory destocking and crop prices. Due to these factors, we are not anticipating a recovery until 2026. Turning now to an overview of substantial new business wins during the fourth quarter. We have continued to expand our share with our commercial vehicle customers as they launch their next generation models leading into the EPA regulation changes.

Many of these products support future growth launching in 2026 and 2027. We are continuing to see growth in our thermal management market share, picking up additional new products during the quarter as our customer continues to grow their market share. We remain focused on diversifying our end markets by targeting content related to power generation, supporting the rapid expansion of data centers. In the quarter, we secured a new aluminum extrusion program with

Operator: one

Jack Reddy, President and CEO, Mayville Engineering Company: of our large power sports customers. This program leveraged existing relationships at MET and will lead to future growth over the coming years. We have continued to gain additional market share with our Access customer as they evaluate their global supply base. Our U. S.

Manufacturing plants located in close proximity to customer facilities continue to provide the best value in their supply chain as they look to increase their volumes. Our sales team is continuing to prioritize the diversification of our end market exposure and customer base. As we have mentioned before, we are in active discussions with new and existing customers to support potential programs in the data center space including but not limited to cooling, electrical infrastructure and standby power applications, which could come into fruition in the next twelve to eighteen months. As before, our MBX framework continues to guide our value creation priorities. Even as demand conditions remain soft, we continue to deploy targeted initiatives around strategic pricing, commercial growth and capital efficiency that over time have positioned Mac to outperform the broader market.

Since September 2022, our team has completed over two seventy five MBX Kaizen events. As a result of these events, the company was able to reduce its legacy manufacturing square footage space by 5% and headcount by 12% along with removing over $5,000,000 in other costs. Additionally, the success of our MBX efforts were evident in our robust free cash flow generation. During the fourth quarter, our free cash flow was over $35,000,000 dollars Even when excluding the recent $25,500,000 settlement with a former fitness customer, our free cash flow conversion for the quarter exceeded 100% of adjusted EBITDA. The strength in our free cash conversion is owed to improving efficiency in networking capital management.

This execution positions us for long term improvement in our financial profile to drive sustainable shareholder value throughout the cycle. We are positioning ourselves to become a leaner, more efficient organization equipped to capitalize on a future demand recovery. Our healthy financial position enables our team to focus on executing our long term strategy. We will remain disciplined in our capital allocation, prioritizing debt repayment, opportunistic share repurchases and accretive strategic acquisitions. M and A remains a key part of our long term strategy as we look to accelerate our expansion into high growth adjacent end markets.

Our team has built a pipeline of acquisition targets that meet our criteria. While we plan to pursue M and A, building on our market leading capabilities, we will remain disciplined and ensure that we are positioned to capitalize on multi year secular growth trends in front of us. Finally, I would like to briefly comment on our longer term outlook. As we first highlighted at our twenty twenty three Investor Day, MEC has been on a multi year value creation journey, one that prioritizes a combination of commercial growth, operational discipline and high return capital deployment. Since that time, we have demonstrated the organic growth potential of the business, realized sustained operational efficiencies and continue to deploy capital through a combination of reinvestment in the business and share repurchases.

While our team has successfully executed on our strategic plan, demand conditions within our core markets have been challenged and remain in flux. While a recovery in the second half of twenty twenty five is likely, given what we see from our customers today, the pace of a full demand inflection could take longer. We remain committed to the targets introduced back in 2023. However, the precise timing of achieving those targets remains subject to how demand conditions shape or determine quarters. Our 2025 guidance reflects our customer conversations and the MBX related efficiencies that we continue to realize across the organization.

I am confident that the actions we have taken to reposition the business during a transitional period have created a foundation for growth that will deliver value to our shareholders over the long term. Before I turn the call over to Todd, I want to thank him for his hard work and dedication in leading and building a strong finance organization. Todd’s leadership has been instrumental in Mac’s growth over the past seventeen years and we wish him well in his next chapter. With that, I will now turn the call over to Todd to review our financial results.

Todd Butts, Chief Financial Officer, Mayville Engineering Company: Thank you, Jag. I’ll begin my prepared remarks with an overview of our fourth quarter and full year financial performance followed by an update on our balance sheet and liquidity, and I will conclude with a discussion of our 2025 guidance. Total sales for the fourth quarter decreased 18.4% on a year over year basis to $121,300,000 The decline in net sales was driven by customer destocking activities and weaker end user demand, which was partially offset by new project launches. Our manufacturing margin was $10,800,000 in the fourth quarter as compared to $18,200,000 in the same prior year period. The decrease was primarily driven by the corresponding decline in net sales.

Our manufacturing margin rate was 8.9% for the fourth quarter of twenty twenty four as compared to 12.3% for the prior year period or a decrease of three forty basis points. The decrease in our manufacturing margin rate reflects the impact of lower fixed cost absorption from lower customer sales, fewer working days in the quarter and the completion of cost reduction activities that will yield due to our margin benefit. Other selling, general and administrative expenses were $7,900,000 for the fourth quarter of twenty twenty four as compared to $7,200,000 for the same prior year period. The increase was primarily driven by higher costs related to compliance requirements and annual wage inflation, partially offset by a reduction in legal expenses relating to our former fitness customers. Interest expense was $2,000,000 for the fourth quarter of twenty twenty four as compared to $3,600,000 in the prior year period due to reduction in borrowings relative to the fourth quarter of last year.

The decrease of $67,900,000 in borrowings over the past year reflects our continued strong free cash flow generation. Adjusted EBITDA for the fourth quarter was $9,200,000 versus $17,700,000 for the same prior year period. Adjusted EBITDA margin decreased by four thirty basis points to 7.6 in the current quarter as compared to 11.9% in the same prior year period. Our fourth quarter adjusted EBITDA margin is a low point in the cycle and should begin to improve sequentially as we enter 2025. Now, I’d like to provide a brief summary of our full year 2024 results.

Net sales for the full year were $581,600,000 a decrease of 1.2% as compared to the prior year. Our 2024 manufacturing margin was 71,100,000 as compared to $69,700,000 in 2023. This reflects a manufacturing margin rate of 12.2% or an increase of 40 basis points as compared to 11.8% in 2023. ’20 ’20 ’4 adjusted EBITDA was 64,400,000 as compared to $66,100,000 in 2023, which resulted in adjusted EBITDA margin for 2024 of 11.1% as compared to 11.2% in 2023. Turning now to our statement of cash flows and balance sheet.

Free cash flow during the fourth quarter of twenty twenty four was $35,600,000 as compared to $19,900,000 in the prior year period. The increase in free cash flow as compared to the prior year reflects the $25,500,000 received from the recently announced legal settlement and our continued focus on net working capital efficiency.

Jack Reddy, President and CEO, Mayville Engineering Company: As of the end of

Todd Butts, Chief Financial Officer, Mayville Engineering Company: the fourth quarter of twenty twenty four, our debt, which includes bank debt, financing agreements and finance lease obligations, was 82,300,000 as compared to $150,200,000 at the end of the fourth quarter of twenty twenty four, resulting in a net leverage ratio of just under 1.3x at year end. Now turning to a review of our 2025 financial guidance. For 2025, we now expect the following: Net sales of between $560,000,000 and $590,000,000 Adjusted EBITDA of between $60,000,000 and $66,000,000 and free cash flow of between $43,000,000 and $50,000,000 Please note that our midpoint assumed demand conditions gradually recovered during the second half of twenty twenty five as customer destocking activities and consumer demand normalize. Additionally, embedded in this guidance is the following view of our current end market as compared to 2024. Commercial vehicle, flat to slightly down.

Construction and access, flat to a low single digit increase. Power Sport, low single digit decrease. Agriculture, low to mid-twenty percentile decline. Military comparable to the prior year and other end markets low to mid single digit increase. Due to its high interest rate sensitivity and current channel inventory levels, we believe our Power Sports market bears the most uncertainty.

Operator: If our end markets were

Todd Butts, Chief Financial Officer, Mayville Engineering Company: to perform below these expectations, it would push our guidance to the lower end of the range. Conversely, the second half market conditions improve at a faster pace than expected, we would anticipate to be near the higher end of our guidance. But given the uncertainty of the current demand cycle, we will continue to monitor and report throughout the year any material changes to this outlook. Furthermore, embedded within our 2025 adjusted EBITDA guidance is $1,000,000 to $3,000,000 of cost improvement driven by our MBX operational excellence and strategic value based pricing initiative, net of inflationary pressures. As it relates to free cash flow guidance, we expect that our capital expenditures for the year will be in a range of between $13,000,000 and $17,000,000 and we’ll continue to focus on high return, capital light automation advancements with payback periods of less than eighteen months, further supporting our planned growth and increasing efficiency.

Based on our free cash flow guidance and excluding any M and A activity, we expect to be below 1x net debt leverage by year end. Lastly, I would like to reiterate that our financial position enables the team to focus on executing our long term strategy. We will remain disciplined in our capital allocation prioritizing debt repayment, opportunistic share repurchase and accretive strategic acquisition, positioning the company to capitalize in the multiyear secular growth trend ahead of us. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.

Operator: Thank you. Our first question comes from Ross Sterenblak from William Blair. Your line is now open. Please go ahead. Hey, good morning.

This is Sam Carlo on for Ross. Thanks for taking my questions.

Sam Carlo, Analyst, William Blair: Good morning, Sam.

Operator: I wanted to touch on your margin guidance for 2025. I know you had planned to use your plant shutdowns in the fourth quarter as an opportunity to execute on some additional MBX initiatives. I was wondering if you could update us on the progress that you’ve made and then give us a sense of how much of this progress is contemplated in your 2025 margin guidance?

Todd Butts, Chief Financial Officer, Mayville Engineering Company: Yes. As it relates to Q4, certainly, we had a lot of activity. We closed a facility. And like we indicated on our remarks that that is the low point. When you look at 2025, we anticipate $1,000,000 to $3,000,000 of improvement driven by MBX as well as pricing, and that is net of inflation.

So you got to keep that in mind. The gross number is a bit higher. But that impact is somewhat muted, meaning that our volume in the first half continues to be in a depressed situation or low point. And so the pull through when you think about all these MBX and cost saving initiatives gets a little bit muted. And so as we begin in the second half and even into 2025, all these cost initiatives that we’ve done will really we’ll see the benefit of that and that pull through in a much more substantial manner as we enter back half of 2025 and into 2026.

Jack Reddy, President and CEO, Mayville Engineering Company: Just to add to that, Sam, we conducted significant number of MBX Kaizens in Q4, as we indicated in our prepared remarks. We also started Q1 with significant activity in many of our plans. We continue to drive cost reduction, productivity improvement projects across our plant network. We have not took the gas pedal or pedal off the foot off the gas pedal, I guess, right? And we continue to drive additional productivity measures across the enterprise.

Operator: Got it. That’s super helpful. And then given your 2025 guidance does not reflect any impact from tariffs, can you help us frame where the companies must expose the potential tariffs from an end market perspective? And then I know the situation is still fluid, but maybe help us frame the sensitivities what the sensitivities could look like if the proposed tariffs remain in place for an extended period of time?

Jack Reddy, President and CEO, Mayville Engineering Company: Absolutely. First, I want to remind everyone that we are as pure play domestic manufacturer as it can get. All of our manufacturing footprint is U. S. Based.

95% of our inputs are domestically sourced. Less than 5% of our inputs, I. E. Hardware, some casting, some forgings, aluminum etcetera are subject to any potential tariffs. So if you think about that within that 5% or less, majority of that is really the aluminum we get from Canada.

And all of our steel and aluminum costs are passed through to our customers. So we’re pretty confident that the current tariff regime at least what was announced yesterday will have limited impact on MEC as a whole. Of course, we will continue to try to mitigate any impact to our customers by finding additional sources, alternative sources to reduce any tariff impact. But on the steel end, aluminum as a whole, it is a pass through expense for us. So we don’t expect any dollar margin impact from these tariffs.

But obviously, if the steel prices go up, aluminum prices go up, that will have an impact on our margin percentage rather than dollar impact.

Operator: Got it. That’s helpful. I’ll leave it there. Thanks guys.

Jack Reddy, President and CEO, Mayville Engineering Company: Thanks, Adam.

Operator: Thank you. Our next question is from Ted Jackson from Northland Capital Markets. Your line is now open. Please go ahead.

Ted Jackson, Analyst, Northland Capital Markets: Thanks very much. Hey, Todd, first of all, I want to tell you that I’m sad that you’re leaving. I’ve really enjoyed working with you and I look forward to hopefully keeping in touch and the great things that you’re going to do with the rest of your life. Thanks, Scott. I appreciate that.

I have a couple of questions. So one of them is you just you talk fast and I write slow. Can you provide the guidance you gave for powersports and ag again, please?

Todd Butts, Chief Financial Officer, Mayville Engineering Company: Powersports, we had the market declining low single digits. And then ag, we had in the twentieth percentile decline, meaning 20% to 25% year over year. Does that clarify your point?

Ted Jackson, Analyst, Northland Capital Markets: That is it. That is it. Then jumping over to tariffs. Is there a case to be made that over the longer term that the change in tariff structures could be good for you? And where I’m going with that is as many of your customers might be forced to bring some of the manufacturing that they do overseas back into this country that they’re going to need partners like Mayville to make that kind of stuff.

And does that resonate with you? Have you had any kind of dialogue with any of your customers or any potential customers as they start rethinking their supply chains and how they might be able to reconfigure them to meet this kind of new dynamic that Trump is bringing into force?

Jack Reddy, President and CEO, Mayville Engineering Company: Yes, Ted, great question. We’ve said this before, there are parts of our end markets and customers that have the flexibility to outsource to low cost countries and regions. And primarily those components are in the powersports market. We’ve seen some of our customers go to Asia as an example or Mexico to manufacture some of these components. So we do anticipate if these tariffs stick, we don’t know, right?

It changes day to day, hour to hour. But if these tariffs stick, we do expect some level of return to The U. S. So we will be a beneficiary of that trend if the tariffs remain. At the same time, we have seen reasonable amount of interest from many of our existing customers to start thinking about completely changing or at least dual sourcing their components to U.

S. Manufacturers like MEC. We have seen increased activity on our quoting team and we anticipate that will be in the long run a tailwind for MEC.

Ted Jackson, Analyst, Northland Capital Markets: Yes. That’s how I would think about it myself. I mean, I understand there’s disruptions, but I think over the longer term, if anything, it’s probably a positive for the company. Third question, just kind of when you gave the free cash flow guidance for $25,000,000, it’s a honestly, it’s a robust number. I wonder if you could kind of walk through some of the mechanics to how that you’re getting there.

I assume a lot of it’s working capital oriented. How are you driving that free cash flow guidance? And then I have one more follow-up

Todd Butts, Chief Financial Officer, Mayville Engineering Company: after that, I believe.

Jack Reddy, President and CEO, Mayville Engineering Company: Yes. I’ll start and then pass on to Todd. In end of twenty twenty two, Ted, we had 6.2 turns of inventory performance. We ended 2024 at 9.1 turns of inventory. That just shows you the power of MBX and then how we are driving down our work in process inventories and our planning of our raw material purchases etcetera.

So net working capital reduction has been a huge lever for us in addition to working with our customers and our suppliers to change payment terms. So those are some of the actions that we have taken over the last couple of years to drive this level of performance and we continue to drive similar activities going into are coming into 2025. And as Jag mentioned,

Todd Butts, Chief Financial Officer, Mayville Engineering Company: I mean, certainly working capital is a big driver and that really is the result of MBX initiative. But not only inventory, but as Jag mentioned, our terms with suppliers, we’ve changed things with our customers to collect quicker. In addition to that, we’ve also we’re reducing a bit on our capital expenditure, $13,000,000 to $17,000,000 versus last year. So all those factors are playing into why we expect to be at that 72% to 76% conversion rate as it relates to 2025%. Certainly, the first quarter will probably be a bit muted, but you’ll see as we historically have done, you’ll see quarters February ’4, we’ll see that nice free cash flow generation.

Ted Jackson, Analyst, Northland Capital Markets: Okay. And then my last question, just on the M and A side. I know it’s something you talk about

Todd Butts, Chief Financial Officer, Mayville Engineering Company: it a lot. It’s nice to know that

Ted Jackson, Analyst, Northland Capital Markets: you have a good pipeline in place. The balance sheet is as strong as it’s been in years. You’re below target in terms of your leverage. I have to imagine that some of the market dynamics that are impacting the top line are hopefully impacting some of the valuation metrics for the targets that you have on that list. Can you talk a little bit about the areas that kind of when you look at that list, like I guess I go to the areas that are kind of the higher on the list in terms of the possibilities, the likelihood we see something in ’25 and what you’re seeing in terms of kind of target values for the values for the kind of acquisitions that you’re looking at.

How about that and size maybe? Thanks. That’s my last one.

Jack Reddy, President and CEO, Mayville Engineering Company: Yes. As we laid out last quarter, I believe, our targeted range would be somewhere between $50,000,000 and $150,000,000 in revenues. And we want these acquisitions to be margin accretive on day one and provide market diversification for us. As we have mentioned, many of our end markets are highly cyclical. So we’re looking for a more secular growth end markets.

So some of them will include and we’re actively pursuing them are in the power infrastructure, standby power related to new investments in data centers and similarly long term highly profitable and growth oriented end markets. So having said that, we can never predict the timing of any of these transactions. Our M and A team continues to be very active engaging with potential targets, working with investment banks and continuing to generate our list of relevant targets based on our framework. At the same time, we have not seen any changes to the multiples. I would say that the multiples have been stable.

Part of the reason is the interest rate regime, which remains high, helps us in terms of multiples even though our interest expense might be higher. But certainly, right, our purchase price will be slightly lower given the current interest rate regime we’re having to deal with.

Ted Jackson, Analyst, Northland Capital Markets: Okay. All right. Well, thanks for the time. Talk to you soon.

Todd Butts, Chief Financial Officer, Mayville Engineering Company: Thanks, James.

Operator: Thank you. Our next question is from Andy Kaplowitz from Citi. Your line is now open. Please go ahead.

Sam Carlo, Analyst, William Blair: Hey, good morning guys. This is actually Jose on for Andy.

Todd Butts, Chief Financial Officer, Mayville Engineering Company: Hi, good morning, Jose.

Sam Carlo, Analyst, William Blair: Both on your release and during the call, you’ve mentioned the muted demand conditions and the expectation for the first half to be weaker and for gradual improvements in the second half. Could you comment though on how you’re seeing the path to the 14% to 16% EBITDA margin targets you had set at your Investor Day when your 25% guidance at the midpoint looks to be around 11%? And obviously with the understanding that revenues haven’t really grown at the levels you had initially expected back then?

Jack Reddy, President and CEO, Mayville Engineering Company: It’s a great question. As we mentioned in our prepared remarks, we continue to see the 2023, Investor Day targets for 2026 as achievable. At the same time, the current base business needs to come back to a normalized level. So those targets are based on those assumptions. Given the current market conditions, we are expecting the timeline of achievement of those targets will take a little longer.

At the same time, we continue to drive significant productivity within our manufacturing network. And 2026, the CV end market will be much higher than 2025. That’s a significant volume given it is 38% of our overall sales. Higher volumes will help us absorb better and volume leverage will help us get into that range in 2026.

Todd Butts, Chief Financial Officer, Mayville Engineering Company: Yes. The other comment I would make was, as you look at our annual 2025 guidance, not to look at it in a silo, meaning we talked about first half, second half. And this really is a first half versus second half story. We expect volumes to be down in the first half as we stated. And that’s going to have an impact on our margin rate.

And so we look at first half, we’re probably in that 8% to 10% range. But second half, we’re growing to that 11%, thirteen % range. And so when you think about how that margin cadence and build up as we enter 2026, we still see a very solid pathway to achieving that 14% to 16%. It’s really just a market volume dependent timing situation.

Sam Carlo, Analyst, William Blair: I appreciate the color guys. And then just as a follow-up, I did want to touch on Hazel Park and see if you could provide us an update on how that ramp has been progressing for you guys, sort of exit run rate that you closed 2024 with and how should we be thinking about revenues in 2025 versus 2024?

Jack Reddy, President and CEO, Mayville Engineering Company: Yes. Nothing has changed with our expectations of Hazel Park. Certainly, current end market demand has impacted top line sales, but we remain on track with our new product launches and we’re well positioned to meaningful bottom line improvements as markets recover.

Sam Carlo, Analyst, William Blair: Got it. Thanks for the time everyone.

Jack Reddy, President and CEO, Mayville Engineering Company: Thank you.

Operator: Thank you. We currently have no further questions. So I’ll hand back to Jag Reddy for closing remarks.

Jack Reddy, President and CEO, Mayville Engineering Company: Once again, thank you for joining our call. We appreciate your continued support of MEC and we look forward to updating you on our progress next quarter. Should you have any questions, please contact Noel Ryan or Stephan Neely at Valum, our Investor Relations Counsel. This concludes our call. You may now disconnect.

Operator: Thank you for joining. You may now disconnect your lines.

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