MEC earnings call analysis

NYSE:MEC Q1 2026 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: Hello, everyone. Thank you for joining us and welcome to the Mayville Engineering Company first quarter 2026 earnings conference 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 one to raise your hand. To withdraw your question, please press star one again. I will now hand the conference over to Stefan Neely with Balam Advisors.

Please go ahead. Stefan Neely | Moderator, Balam Advisors

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 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 risk 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 Chag.

Jag Reddy | President and Chief Executive Officer

Thank you, Stephan, and good morning, everyone. Our first quarter results exceeded our expectations, driven by strong top-line momentum in our data center and critical power and 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 data center 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 data center 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 data center 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 data center and critical power continues to contrast with mixed conditions across our legacy and 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 pre-buy activity, and strong Class 8 orders earlier in the year. That said, current OEM production levels remained largely consistent over the past six 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 non-residential activity, although demand remains more customer-specific than broad-based. In power sports, 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 data center 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 AccuFab-related cross-selling opportunities. Overall, demand from OEM customers in the data center 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 data center 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 data center 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 Rochelle, 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 vehicles customers as they launched 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 data center and the 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 data center 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 2.5 times, 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 data center 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 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 Rachelle.

Rachelle Lair | Chief Financial Officer

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 ACUFAB 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 data center and critical power related project launch costs non-recurring restructuring costs, and lower volumes in our legacy end markets. These factors were partially offset by the higher margin sales contribution from the AccuFab 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 AccuFab 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 AccuFab 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 and market volumes and $1.2 million of project launch costs partially offset by the benefit of the AccuFab acquisition. During the quarter, we also continue to execute our previously announced footprint optimization actions, including the consolidation of four warehouse locations and one manufacturing facility. We expect these actions to generate annualized savings of approximately $1 to $2 million and are already contemplated within our full year outlook. Turning now to our cash flow in 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 4.4 times as of March 31st. 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 data center 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 AccuFab 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.

Operator | Conference Operator

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please 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 comes from the line of Mike Schliske with D.A. Davidson. Your line is open.

Please go ahead. Mike Schliske | Analyst, D.A. Davidson

Yes, hi. Good morning. Thanks for taking my questions. Good morning. I wanted to ask maybe a two-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 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, you know, most of you feel 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, you know, down mid-teens to flat due to how you feel about the very end of the year and what OAN is telling you about ramping up for 2027, you know, asking suppliers like, you know, Maybill 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 early in the 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 a year-end they're asking you to slow down in advance of some challenges they might be seeing in 2027. Just so maybe a small detail about both those markets would be appreciated.

Jag Reddy | President and Chief Executive Officer

Yeah, first of all, Mike, you know, 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 that 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 good amount of strength driven by non-residential ag demand. Some of it driven by data center 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 access segment to be flat versus slightly up.

spk06

Okay.

Okay. Mike Schliske | Analyst, D.A. Davidson

Thanks for that. Turning to data center, 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 or some of the coding that you've been doing. Because I think, Michelle, 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 brand new footprint at this point, given the little demand, or are you still looking to convert? existing buildings to data center. Just some more detail as to how this might all 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?

Jag Reddy | President and Chief Executive Officer

Let me address that, Mike. We announced a closure of four locations. Those are mostly warehouses that we consolidated into Our manufacturing site, that was the restructuring we announced last year, the second half, and then we just wrapped those up. We're not in process of closing any manufacturing footprint, number one. Number two, we have converted approximately six, potentially a seventh plant as well. to data center manufacturing. So we're retooling, you know, between six and seven plants as we speak here to produce data center products. We continue to add capital as needed in these seven locations to offset existing manufacturing assets to continue to take on additional data center volumes. we do see significant growth in the data center 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 to $60 million of cross-selling synergies in 2026 alone. I continue to be very bullish on data center 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, at this stage, we're able to support our legacy customers as they continue to ramp and also take on incremental data center volumes in these seven locations.

Mike Schliske | Analyst, D.A. Davidson

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

Jag Reddy | President and Chief Executive Officer

Yeah, 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. I would say that it hasn't impacted us. At the same time, you know, approximately 30 to 40% of our aluminum is imported from Canada. And then, you know, 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 MEX.

spk06

Okay. I appreciate that, Keller. I'll pass it along.

Thank you. Operator | Conference Operator

Your next question comes from the line of Ross Sparenbleek with William Blair. Your line is open.

Please go ahead. Ross Sparenbleek | Analyst, William Blair

Hey, good morning.

Jag Reddy | President and Chief Executive Officer

Morning, Ross.

Ross Sparenbleek | Analyst, William Blair

Sounds like you guys have been busy. Some good problems to have here. Maybe just starting with the new customer wins, you know, continued momentum in data centers in the first quarter. Anything one time in nature to call out, or are you sensing that customer buying patterns are starting to change here within the data centers in the power market?

Jag Reddy | President and Chief Executive Officer

Yeah, good question, Ross. In the data center market, some of the significant wins we had in Q1 actually came from two brand new customers to MEC and ACUFAB. We never did business pre-ACUFAB days. So those two customers significantly contributed to the wins in Q1. We expect those two 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 of their manufacturing process to someone like MECC. To think about our legacy customers in ag or construction or CV, over the decades, they exited fab operations to suppliers like MECC. We're seeing a similar process happening slowly, but steadily in the data center 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 significant portion of that outsourcing that is that is starting in this industry, right? So all of those are positives, tailwinds for the industry and for Mac going into the future.

Ross Sparenbleek | Analyst, William Blair

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

Jag Reddy | President and Chief Executive Officer

I mean, our penetration at this point, Ross, and take the top 10 potential customers, our existing customers, is low single digits or less, right? You know, we're sub 5% penetration. And hence, my optimism for the industry and for our customers is that as we're going to even rest of this year, 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, you know, this is a multi-year secular growth opportunity for MEX.

Ross Sparenbleek | Analyst, William Blair

Yeah, I mean, just expanding on that, I mean, it sounds like the whole market's heading for a capacity squeeze. So maybe 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?

Jag Reddy | President and Chief Executive Officer

That's a great question. Our intent at this point is to continue to serve our longstanding 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 and our prepared remarks allude to that fact that we're looking at potentially in the long run, a significant organic investment opportunity as we think about expanding capacity for data center customers while continuing to serve our legacy customers.

Ross Sparenbleek | Analyst, William Blair

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

Jag Reddy | President and Chief Executive Officer

Absolutely. And I can tell you that that's been a long time coming, Hazel Park story. We just put approximately $55 million worth of data center products into Hazel Park in Q2, Q1, Q2. We're ramping approximately $55 million worth of data center 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 data centers 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.

Ross Sparenbleek | Analyst, William Blair

All right. Well, very nice quarter, all things considered.

I'll pass it along. Jag Reddy | President and Chief Executive Officer

Thank you, Ross.

Operator | Conference Operator

Your next question comes from the line of Greg Palm with Craig Hallam. Your line is open.

Please go ahead. Greg Palm | Analyst, Craig-Hallam

Morning, Greg. Hey, thanks. Good. Yeah, good morning, Greg, Rochelle. 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?

Rachelle Lair | Chief Financial Officer

Yeah. As we pointed out in the prepared remarks, 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 were 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 when we hit that full run rate production levels, we're back to the margin levels of the overall end market.

Greg Palm | Analyst, Craig-Hallam

Okay. Understood. And as we think about, you know, 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, you know, from them in terms of, you know, how much bigger are the orders getting because they're outsourcing more business to you or they're winning a lot more business themselves. 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 walked us through those dynamics.

Jag Reddy | President and Chief Executive Officer

Let me clarify, Greg. You're asking all of this in the context of data center customers, existing data center customers versus new?

Greg Palm | Analyst, Craig-Hallam

Correct.

Jag Reddy | President and Chief Executive Officer

Yeah, that's absolutely right. As we bring on, as I mentioned, we brought on two brand-new customers to MECC, 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 Mac, AcuPabs legacy data center 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 AccuFab 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 AccuFab customers are doing is looking at their own footprint, their own resources, and making choices around outsourcing additional work to suppliers like Mac. So there is new customer growth, there is existing customer volume growth, and then there's existing customer market penetration or market share gains. So that's how I would position the growth we're seeing in this end market.

Greg Palm | Analyst, Craig-Hallam

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

Jag Reddy | President and Chief Executive Officer

No, that's the total capacity. Historically, we have always talked about Hazel Park being a $100 million plant. As I just said, we put $55 million worth of data center work into that plant. We still have another 15 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 to 25 million of data center work into Hazel Park? Absolutely. So that's what we're trying to do.

Greg Palm | Analyst, Craig-Hallam

Okay. Makes sense. And I guess just, you know, last question to me is I'm, is I'm thinking about the full year guide and backing into the second half, you know, it implies an EBITDA run rate on a quarterly basis. That's pretty close to 20 million. And, you know, 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.

Rachelle Lair | Chief Financial Officer

Yes, so when you look at our legacy business, you can look back to 2024 when we were hitting, you know, 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, you know, we're on our way towards that 15% plus that we would like to be long-term. You throw in, you know, 20% plus in the data center 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.

Greg Palm | Analyst, Craig-Hallam

Okay.

I'll leave it there. Thanks. Operator | Conference Operator

As a reminder, if you'd like to ask a question, please press star one to raise your hand. To withdraw your question, please press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Your next question comes from Ted Jackson with Northland Securities. Your line is open.

Please go ahead. Ted Jackson | Analyst, Northland Securities

Thank you very much. Congrats on the quarter. So my first question, I want to just touch on the second quarter guidance. You know, you're looking for midpoint $150 million. You know, it's comfortably above, I call it the consensus view. The legacy markets themselves, at least in, you know, 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, is that that would, William Newburry, M.D.: : help me that you know, perhaps you're going to see maybe even more business coming out of the data Center you know our side of things, and perhaps you thought going into the year. William Newburry, M.D.: : Is there, do you see that that business being able to hit your 20% of revenue target in the second quarter alone.

Rachelle Lair | Chief Financial Officer

Jennifer Proulx, M.D.: : 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, you know, 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 data center and critical power being at full production run rates.

Ted Jackson | Analyst, Northland Securities

And what is the full production run rate for data center critical power?

Jag Reddy | President and Chief Executive Officer

Well, we have always targeted, please publicly commented, Ted, our ambition is to be at 25% of our total volumes to be in data center and critical power and market. I do see that target in our reach, certainly on an exit run rate for 2026 and certainly for 2027.

Ted Jackson | Analyst, Northland Securities

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, you know, ability to generate some revenue that then, you know, kind of falls away. I mean, I, you know, like power sports comes to mind because, you know, you've had some performance there, but you keep highlighting this in driven by very project oriented stuff. And it's not like, you know, long tail project, you know, uh, customer wins. I'm just trying to understand like how to get to that one 50, if it's not coming. from a faster ramp in the power and data market than may be accepted?

Jag Reddy | President and Chief Executive Officer

Yeah, we have looked at commercial vehicles ramping, you know, starting in, you know, May-ish. So May and June could have a slightly higher commercial vehicle run rate as our OEMs ramp. Power spores is probably not the market that I would expect to help us in Q2. We continue to see significant outsourcing to Asia from our power sports 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 project. Run rate type of business in power sports that could help us in Q2.

Ted Jackson | Analyst, Northland Securities

Okay. Okay. I think you've given me what I needed there shifting over to capacity. I mean, you have 1 of the better problems that a manufacturing company can have, which is demand that might is pushing you to capacity constraints. know given your current footprint and the uh the potential we'll just call it potential for a lot of your legacy markets turn around at the same time that this power data center market is coming um how much revenue do you think you could run through your existing footprint um and what does it take to do i mean i mean i assume that you're running it you know like I assume you could add shifts and increase capacity that way. I mean, maybe just in discussion, you know, like at your current level, where could you take your revenue run rate to? And then, you know, all else being equal, that you're at your same footprint, how could you take your revenue higher?

Jag Reddy | President and Chief Executive Officer

Yeah, 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. Now 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 mixed differences between data center 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 data center customers. We have capacity in the Midwest, but some of the products we're manufacturing for some of the data center 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, you know, what's the timeline by which we will run out of our existing capacity? And then how do we think about expanding our capacity organically?

Ted Jackson | Analyst, Northland Securities

And that 850 million run rate, that without further investment, that's running, you know, the same shift counts or if you're getting nearby, you're just utilizing your facilities more by adding shifts.

Jag Reddy | President and Chief Executive Officer

Yeah, we are feverishly adding people and shifts to our plans in the last four or five months. Some of our plans are running seven days a week. Some of our plans are running full 24 hours and five days a week. We're running 10% to 12% over time in many of our plans right now. and continuing to hire in many of our clients that are seeing volume growth, particularly driven by data center customers.

Ted Jackson | Analyst, Northland Securities

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, you know, what's sitting there in front of you. I'll get out of line. Thanks again for... taking the questions and congrats on the results.

Jag Reddy | President and Chief Executive Officer

Thank you, Ted.

Operator | Conference Operator

There are no further questions. Oh, apologies. Your next question comes from the line of Andrew Kaplowitz with Citibank. Your line is open. Please go ahead. for Andy Kaplowitz\ Hi, good morning. This is Natalia on behalf of Andy Kaplowitz.

Jag Reddy | President and Chief Executive Officer

Morning, Natalia. for Andy Kaplowitz\ I think the first question I'll just ask is I'm just curious As you continue to highlight strong momentum within data center and critical power, yet your broader other end market outlook is flat for FY26. Can you maybe help us unpack what areas within that category are offsetting that data center and critical power related strength? I think you mentioned on your side there's like modest activity from those growth initiatives.

Jag Reddy | President and Chief Executive Officer

Right. As we mentioned earlier, Natalia, Ag is flat. Construction access is flat. Power spores 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. Now our current forecast guidance assumes a $240,000, sorry, 240,000 unit built for the year. That is higher than what we started the year with, but at the same time, it's lower than what ACT 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 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. for Andy Kaplowitz\ I appreciate that, but I'm just curious about your other end market, like the other end market that you guys have on your slide with .

Rachelle Lair | Chief Financial Officer

Yeah, I think the biggest thing here is as we've been growing, you know, in data center and critical power. We really have been focused on growth initiatives there. This is, you know, 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 data center and critical power classified. So we're seeing a big piece of what maybe would have been growth and extrusion here and other be extrusion growth and data center and critical power.

Jag Reddy | President and Chief Executive Officer

So some of this is really reclassification from other into data center market. for Andy Kaplowitz\ Got it. Makes sense. Much appreciated. And then one last question, Maya. You know, we appreciate the long-term growth opportunities and data centers and critical power. Both 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 de-lever and continue investing in these growth initiatives?

Rachelle Lair | Chief Financial Officer

Yeah, we... We definitely are focused on de-levering. That's 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 data center and critical power at higher margin, plus some expectation of that CB market coming back in the second half that we'll be able to generate some additional cash flow to focus on delivering with the goal of being below that three times 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. for Andy Kaplowitz\ Thank you so much.

Operator | Conference Operator

We have a follow-up question from Greg Palm with Craig Hallam. Your line is open.

Please go ahead. Greg Palm | Analyst, Craig-Hallam

Yeah, thanks. 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?

Jag Reddy | President and Chief Executive Officer

It should not Greg. So if. The market actually builds up that 9 plus percent build rate, but also let me remind you that you know the 9% is actually retail sales is how a CT would report. You know which is pretty close to the bill rates anyway, but you know, let's say that's approximately 9% bill rate. Yes, we should see. a very similar pale wind for our segment revenue.

Greg Palm | Analyst, Craig-Hallam

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

Jag Reddy | President and Chief Executive Officer

I would say that since the acquisition significant portion of our wins are have been for long running products these customers will continue to offer to various data center 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.

Greg Palm | Analyst, Craig-Hallam

Okay.

Appreciate the call. Jag Reddy | President and Chief Executive Officer

Thank you, Greg.

Operator | Conference Operator

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

Jag Reddy | President and Chief Executive Officer

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're 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.

Operator | Conference Operator

This concludes today's call. Thank you for attending. You may now disconnect. jsPDF 3.0.3 D:20260606090231-00'00'

NYSE:MEC Q4 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Operator: Hello, everyone, and thank you for joining us today for the Mayville Engineering Company fourth quarter and full year 2025 results conference call. My name is Sammy, and I'll be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad to remove yourself from the question queue. I'm now allowed to hand over to your host, Stefan Neely, with Valum Advisors to begin. Please go ahead, Stefan.

Stefan Neely | Host, Valum Advisors

Thank you, operator. On behalf of our entire team, I'd like to welcome you to our fourth quarter and full year 2025 results conference call. Leading the call today is MEC's President and CEO, Jag 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. 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 mechinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Chad.

Jag Reddy | President and Chief Executive Officer

Thank you, Stephan, and good morning, everyone. The fourth quarter represented a transitional period for MEC. While demand in our legacy end markets remained muted during what is typically a seasonally softer quarter, our team remained focused on positioning the business for successful execution and growth as we enter 2026. For the past six months, we have experienced robust and sustained demand momentum within our data center and critical power and market. In response, we have proactively reallocated available capacity and resources to support successful project launches and meet the evolving needs of our OEM customers in this market. As a result of these actions, our fourth quarter margin performance was pressured. we incurred and retained costs that would typically be flexed with softer demand, reflecting deliberate investments to support program readiness and execution. Importantly, this margin pressure is primarily driven by early stage project inefficiencies and project launch costs as we prepare for higher volume programs rather than pricing or structural cost challenges. As these programs ramp and utilization improves, we expect margins to normalize in line with our long-term expectations. These margin dynamics are transitory in nature and, importantly, position MEC to deliver profitable growth in 2026 and beyond as we capture demand in the rapidly expanding data center, and critical power market. In addition, we remain focused on executing our MBX operational excellence framework, driving discipline process improvements across our plans. We're also advancing initiatives to optimize and rationalize our manufacturing footprint, which we expect will further enhance operating leverage as end market demand recovers. Now turning to your review of our key markets and the respective end market outlooks. Starting with commercial vehicle. Continue to. With net sales to this end market declining approximately 19% versus the prior year period. In their most recent report, ACP has revised its full year 2026 outlook upwards, now projecting. a 3.4% increase in Class 8 production in 2026. This improved outlook reflects greater clarity surrounding the 2027 EPA emission standards, resulting in anticipated pre-buy activity and improved macroeconomic conditions. In contrast, our construction and access market revenues increased approximately 13% year over year during the quarter. This is supported by the acquisition and strong non-residential activity. Organic net sales growth in this market were approximately 11% in the quarter. In the power sports market, net sales grew approximately 20% year over year, driven by the impact of incremental volumes from new business wins and stabilized customer production schedules as dealer inventory levels are now in line with current demand. This was partially offset by a decrease in sales within the marine propulsion market. Net sales in our agriculture market were approximately flat year over year amid signs that demand is reaching a cyclical trough. Within our data center and critical power end market, Our business saw growth of approximately 13% year-over-year, supported by legacy OEM demand growth and early project launches on AccuFab-related cross-selling opportunities. Overall, demand from OEM customers in the data center and the critical power market remains strong. Our qualified opportunity pipeline now exceeds $125 million and The value of projects scheduled to launch in 2026 is approximately $40 to $50 million. Combined with organic growth from our legacy OEM customers, we expect data center and critical power to represent more than 20% of our revenues in 2026. Looking ahead, we expect this end market to remain a consistent growth opportunity for MECC. Based on recent market studies, we estimate our serviceable addressable market to range from 115 million to $185 million per gigawatt of new data center capacity installed. Given the number of new data centers expected to come online in the US in 2026, this represents a total market opportunity of approximately $3.2 billion. we expect this market to grow at a compound annual rate of approximately 16% from 2026 to 2030. Please note, these estimations exclude server racking opportunities, which represents additional incremental upside. While we will continue to take a balanced approach to allocating capacity to this end market, the robust demand growth allows us to proactively manage our commitments. This approach ensures us to maximize footprint utilization, deliver consistent, profitable growth through the cycle, and continue to invest in growth initiatives that unlock long-term value. Before turning the call over to Rochelle, I want to highlight several areas of commercial momentum that gives us confidence in our growth trajectory for 2026 and beyond. Across all of our end markets, customer engagement and bidding activity remains strong. During the fourth quarter, we secured approximately $15 million in new project awards with data center and critical power customers. Year to date, total awards across our legacy markets were more than $108 million, exceeding our annual target of $100 million. Looking ahead to 2026, we expect total bookings across our end markets to be approximately $140 million, supporting profitable growth as our legacy markets move toward a cyclical recovery exiting 2026. Within our legacy end markets, we have continued to expand our share with our commercial vehicle customers as they launch new products heading into the 2027 EPA regulation changes. These products support future growth and are scheduled to begin production in late 2026 and 2027. In addition to the future expansion in commercial vehicle revenues, we secured new agriculture business on new model introductions and additional service business for a military customer. Within the data center and critical power market, approximately $15 million of awards secured in the fourth quarter were primarily driven by demand from major AccuFab customers. These substantial scopes of work span power distribution units, static transfer switches, busway components, and data center cooling. Turning to capital allocation, We closed 2025 with strong free cash flow generation. While we expect free cash flow to be softer in the first quarter, we continue to anticipate full year free cash flow conversion of approximately 50% to 60% of adjusted EBITDA. As we progress through the year, our primary use of free cash flow will remain focused on debt reduction. As we progress toward our long-term target of 2.5 times leverage, we expect to become increasingly opportunistic in deploying capital towards M&A with an emphasis on further diversifying our end market exposure and supporting consistent profitable growth. In the meantime, our priority remains disciplined capital deployment, ensuring that growth investments are targeted return driven and fully aligned with maintaining balance sheet strength. With respect to guidance to provide investors with greater visibility into our business trends, we are introducing quarterly financial guidance in addition to our full year outlook. This is due to the fast moving data center and critical power environment and developing improvements within our legacy and markets. Rochelle will cover our guidance in more detail, but I would like to highlight a few key elements of our expectations for 2026. Inclusive of a full year of ACUFAB and the associated data center and critical power cross-selling synergies we expect to realize in 2026, we anticipate full year net sales to increase relative to 2025, along with margin expansion, and improved free cash flow. These expectations assume an improvement of our legacy end markets, primarily during the second half of the year. In summary, MEC is entering an important transitional year, one that is shaping the next phase of our growth and value creation. While we are intentionally investing both capital and operating resources ahead of anticipated demand, we believe the foundation for sustainable growth and improved profitability is firmly in place. With disciplined execution and a clear strategic focus, we are well positioned to deliver long-term value for our shareholders and our customers. With that, I would like to turn the call over to Rochelle.

Rachelle Lair | Chief Financial Officer

Thank you, Jag, and good morning, everyone. Total sales for the fourth quarter increased 10.7% on a year-over-year basis to $134.3 million. Excluding the impact of the AccuFab acquisition, organic net sales declined by 5.3% compared to the prior year period. Our manufacturing margin rate was 6.6% for the fourth quarter of 2025 compared to 8.9% for the prior year period. The decrease in our manufacturing margin rate was due to $1.2 million of data center and critical power related project launch costs and $1.7 million of early stage project inefficiencies on a commercial vehicle project. This was partially offset by higher margin net sales contribution from the AccuFab acquisition. Excluding these temporary launch phase dynamics, our manufacturing margin rate would have been approximately 9% during the quarter. Other selling, general, and administrative expenses were $9.7 million or 7.2% of net sales for the fourth quarter of 2025 as compared to $7.9 million or 6.5% of net sales for the same prior year period. The increase in these expenses primarily reflects $0.2 million and non-recurring costs, and $1.1 million in incremental SG&A expense, each associated with the AccuFab acquisition. Interest expense was $3.8 million for the fourth quarter of 2025 as compared to $2 million in the prior year period. The increase was driven by higher borrowings resulting from the AccuFab acquisition, partially offset by lower SOFR base rates relative to the prior year period. Adjusted EBITDA margin was 4.7% for the quarter compared to 7.6% in the prior year period. The decrease reflects lower legacy market volumes and $2.9 million of project launch costs and early stage project inefficiencies, partially offset by the benefit of the ACUVAB acquisition. Excluding these items, adjusted EBITDA margin would have been approximately 7%. Turning now to our cash flow and the balance sheet. Free cash flow during the fourth quarter of 2025 was $10.2 million as compared to $35.6 million in the prior year period. The year-over-year decline primarily reflects the receipt of $25.5 million in settlement proceeds in the fourth quarter of last year related to a former fitness customer dispute. Excluding this item, free cash flow was approximately flat year over year. During the fourth quarter, we used available free cash flow to repay approximately $10 million in debt, resulting in net debt at the end of the quarter of $205.3 million, up from $82.1 million at the end of the fourth quarter of 2024. Our increased debt resulted in a net leverage ratio of 3.7 times as of December 31st. Now turning to a review of our 2026 financial guidance. As Jake previously mentioned, we are introducing quarterly guidance in addition to full year guidance. For the first quarter of 2026, we currently expect net sales for the quarter of between $137 million and $143 million. An adjusted EBITDA of between $5 million to $7 million. Our first quarter outlook reflects continued project launch costs and margin pressure ahead of the majority of data center and critical power project ramps, which begin in the second quarter. Additionally, free cash flow is expected to reflect normal seasonal working capital usage, incremental working capital investment to support the data center and critical power ramp-up and planned capital expenditures of $3 million to $5 million. For the full year, we expect net sales of between $580 million and $620 million, adjusted EBITDA of between $50 million and $60 million, and free cash flow of $25 million and $35 million. This outlook reflects a full year of AccuFab ownership $40 million to $50 million of incremental cross-selling revenue and a gradual improvement in the legacy and market demand, primarily in the second half of the year. Additionally, embedded within our 2026 adjusted EBITDA guidance is $2 to $3 million of cost improvements driven by our MBX operational excellence and strategic value-based pricing initiatives net of inflationary pressures. As it relates to free cash flow, we expect our free cash flow conversion for the full year to be between approximately 50% and 60% of adjusted EBITDA, coupled with full year capital expenditures to be between $15 million to $20 million. Given this outlook and our priority of repaying our debt, we expect to achieve a net leverage ratio of three times or lower by the end of 2026. Again, 2026 will be a transitional year for us. We believe that our cost structure and working capital discipline will position us for profitable growth, strong free cash flow yield, and approved adjusted EBITDA margins as we enter a phase of cyclical recovery and growth across our legacy end markets, supported by elevated growth in our data center and critical power end market. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.

Operator | Operator

Thank you very much. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two on your telephone keypad to remove yourself from the question queue. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Michael Shilsky from D.A. Davidson. Your line is open, Michael.

Please go ahead. Jag Reddy | President and Chief Executive Officer

Morning, Michael.

Linda | Analyst, D.A. Davidson

Thank you. Yeah, this is Linda. Hey, Jag. My first question. Hi. So my first question, starting with commercial vehicle market. In your remarks, Jag, you noted revised ACT Outlook. And from the data we got overnight, it shows that Class A track orders for February were one of the top 10 months of all time. Does this change your view on 2026 and do you think any of it pulled from 2027 orders if this is just an emission related prebuy?

Jag Reddy | President and Chief Executive Officer

Yeah, great question Linda and I was expecting that question this morning. You know I didn't see the AC T report until I got up this morning, right? So obviously it's fresh up the press. I I'm I was not surprised by. the increase in orders in February, but obviously we were surprised by the magnitude of increase of orders in February. We have seen signals from our OEMs in the last month or so inquiring us about, and other suppliers, about capacity utilization, and we have seen signals from them of potential build rate increases. What I can tell you is we have not seen any of those signals translate into demand yet. Having said that, we expect, again, given this morning's news, we expect some of this demand to accelerate the bill rate increases from our CV customers, and we expect that to start showing up in mid to late Q2, usually for most suppliers it's a six-week lead time, And hence, we haven't seen that yet in our EDI feeds, but we do expect that. So with that in mind, you know, we came into this call expecting approximately a 230,000 build rate. We'll have to wait and see if that estimate changes in the coming quarters. And that's one of the reasons why we came out with our quarterly guidance, which is new for us. These are fast-moving developments in our legacy end markets. We're seeing similarly green shoots in construction and small ag as well. So with all of that, we wanted to be more nimble, not only internally but also externally, how we're communicating with our shareholders.

Linda | Analyst, D.A. Davidson

Great. Yeah, I appreciate the color. That's very helpful. And then switching to ag, we keep hearing about ag. getting better, whether that's from John Deere, orders from John Deere or other suppliers getting a little more bullish. Do you see any light at the end of the tunnel on that end market?

Jag Reddy | President and Chief Executive Officer

As some of our customers have indicated, the large ag will still be down this year, double digits. That is our customer forecast, what they have publicly communicated. But we are seeing signs of improvement in small ag, lawn care, turf, and forestry equipment. So we do see some green shoots, as I mentioned, in the ag business. I also want to remind you that our ag business is close to 5% of our overall sales, as much as it used to be a much larger piece of our business. With our data center business and other end markets continuing to grow and ag continuing to stay down in the last 18 to 24 months, it is now a much smaller piece of our business.

Linda | Analyst, D.A. Davidson

Got it. And then, yeah, my last question will be on critical power. You mentioned some launch costs in critical power providing a margin headwind in 2026. Do you think that will be complete by 2027, and what kind of margin tailwind might that be next year?

Rachelle Lair | Chief Financial Officer

Hi, Linda. This is Rachelle. Just as we look ahead into 2026, we really see that being ahead of the program launches, and we really expect and anticipate most of that to start taking place to be at full run rate. at the end of the second quarter. So we really expect to be at full run rate for the second half of the year. So we expect to incur more of those costs having the margin pressure in the first half. We do anticipate a little bit trailing into the second half of the year, but it's really going to be a first half impact.

Linda | Analyst, D.A. Davidson

Thank you so much. Thank you for your time this morning.

Jag Reddy | President and Chief Executive Officer

Thank you, Linda.

Operator | Operator

Paul Cecala, On excursion comes from Greg palm from great how to get on a zip and Greg please go ahead yeah thanks good morning everybody.

Greg Palm | Analyst

Paul Cecala, You know you, you see your incurred more costs and and recognize you know lower margins than expected, you know back from the November call, so I guess like looking back. What surprised you relative to that outlook? And then maybe you can just help unpack the EBITDA guide specifically for Q1 and maybe more specifically how that margin progression looks in sort of the Q2 to Q4 time period. It sounded like there's gonna be some costs that you incur in Q2 and those mostly trail off in the second half. So just wanted to be sure we understood that right.

Jag Reddy | President and Chief Executive Officer

Yeah, let me start first, Greg. The headline really for us is we have won more business in data centers than we anticipated coming out of our November call. We expect our Q1, we're not obviously talking about Q1 bookings here, but our Q1 bookings for data centers will be significantly higher than what we have seen in the second half of last year. after the acquisition. So in preparation for those launches, we're in the middle of many of those launches already for the business. We have won in Q1, so we had to bring on significant resources online, not only in December, but also in Q1 as we sit here. And that's the primary reason why we were showing the margin profile that we're showing in Q1.

Rachelle Lair | Chief Financial Officer

And I would add, you know, our legacy business, we always had product launches, but we were doing that over, you know, 12 to 18 months, a much longer time. And we were able to do that. This, you know, this business is eight to 12 weeks. And so we've had to expedite that and really make investments. We have a product launch team, specific focus to this more than we've ever had before because of the speed and the intensity of which our customers are asking for things. Again, as Jake mentioned, this really did exceed our expectations and what we're winning. When we first acquired this business, we've said, hey, it's going to be 1 to 2 million in cross-selling synergies in 2026. And here we now are at 40 to 50. So we've just had to invest more. And we're seeing that continue into Q1 because a lot of these won't be at their full Q1 and Q2. A lot of these won't be at their full run rate until the end of the year, but we want to nail it. We want to make sure we hit it out of the park with these new customers in our locations.

Jag Reddy | President and Chief Executive Officer

We are retooling six of our legacy plans, MAC plans. That's a significant effort to put data center work, not only what we have won so far year to date and last year, but what we are anticipating in the future In 2026 right so it's great news, obviously, for us to the year and long term that we're able to quickly convert six of our facilities for cross selling synergies.

Greg Palm | Analyst

Okay that's that's great color and you already mentioned you're expecting that end market to represent more than 20% of revenue i'm just curious as we sit here today. what kind of visibility do you have into that, you know, call it $125 million revenue number if you want to use that. And, you know, there's a sentence in the press release that talks about pipeline and multiple large opportunities. Are these multiple large opportunities in that $125 million number or is that something separate?

Jag Reddy | President and Chief Executive Officer

So I would say with pipeline, very good confidence that we have good line of sight to that 120 million dollars worth of data center business for the year so that's number one number two um very little of significantly large opportunities are in that qualified pipeline number we put out Greg Palm | Analyst: Sorry, say that one more time.

Jag Reddy | President and Chief Executive Officer

So, some of the large, significantly large opportunities that we are pursuing, those are either, it's, you know, one or zero, right? So, we didn't want to take into account those opportunities into, we didn't want to inflate our pipeline with those large opportunities, right? So, when we talk about the 125 million of qualified pipeline, That is most of that is, you know, visibility and, you know, greater than 50% confidence that we could win those opportunities. So we're excluding some significantly large opportunities in that qualified pipeline.

Greg Palm | Analyst

Okay. And just to be clear, like, is there, like when you talk about expectations for the year, if you were to, you know, win more small business or win, you know, one or a few of these large, is that something that could translate into more revenue this year above and beyond that 120 number? Or should we think of that more like a 2027 event?

Jag Reddy | President and Chief Executive Officer

Yeah, it's possible, Greg, and hence our effort at quarterly guidance here. This is a fast-moving end market, and we do – you know, though we laid out a 40 to 50 million cross selling synergies, our expectation is that if we continue to win at the existing win rates in this end market, right, there could be upside to that number.

Greg Palm | Analyst

Okay, perfect. All right. I will leave it there.

Thanks. Thank you. Operator | Operator

Our next question comes from Ross Sparenbleck from William Blair. The line is open, Ross.

Please go ahead. Sam Karlovan | Analyst, William Blair

Good morning. This is Sam Karlovan for Ross. Thanks for taking my question.

Jag Reddy | President and Chief Executive Officer

Hey, morning, Sam.

Sam Karlovan | Analyst, William Blair

I guess maybe starting with Rochelle, can you help us parse out some of the moving pieces within the EBITDA guidance? I mean, how should we build to just an $8 million year-over-year step-up, considering 2026 includes a full year of ACUFAB and an incremental $40 to $50 million of margin of creative cross-selling?

Rachelle Lair | Chief Financial Officer

Sure. I think there's a couple of things to take into account here. One is our legacy business. The volumes continue to remain muted as we budgeted today. Now, of course, we just talked a little bit about what we learned on CV overnight, that there's some upside there. But as we look through the year, our customers are saying, our guidance is saying that we expect most of those to start to rebound sometime in the second half of the year. So we have that pressure. continuing on that piece of our business. We have a high fixed cost, you know, 55% of our costs are fixed. And so when we have that lower utilization, we really have ongoing under absorption associated with that. The other piece is preparing for that legacy, you know, rebound. We are carrying some talent that we continue to hold on to because it is coming. And then the third piece is those launch costs. We, like I said, really want to make sure we hit it out of the park, the speed is faster, we're ramping up talent, we're learning as we go with this, and it is exciting to see the growth that we have with that, but we really need to be focused on delivering that. So first half is really pressured by the absorption, the launch cost, and then getting ready for the rebound.

Sam Karlovan | Analyst, William Blair

Got it. Have you given kind of what those launch costs are expected to be for the full year? Or just any sort of range there would be helpful?

Rachelle Lair | Chief Financial Officer

Not full year, but we are looking, we expect the first quarter to be very similar with the fourth quarter of launch costs for data center, critical power, one to one and a half million. We expect that to taper down through each of the quarters of the year.

Sam Karlovan | Analyst, William Blair

Okay. Got it. I guess switching gears then, I mean, the 40 to 50 million of in-year revenue synergies, sounds like that's back half loaded. I mean, it seems like that implies a pretty healthy exit rate exiting 26. So I don't know if you could kind of help us size that ramp and kind of what that means as we enter 2027 of the business you guys have already won.

Rachelle Lair | Chief Financial Officer

Yeah, I think, you know, as we look at and we're seeing for 2026, data center and critical power could be 20% of our total business. So that's significant. The adjusted EBITDA margins on that business are between 20 and 22%. So when you take that into account, knowing that the majority of that 40 to 50 is going to come in the second half of the year, we will be exiting with margins in excess of our historical. If our historical business continues to come up, that will only additionally be upside.

Sam Karlovan | Analyst, William Blair

Okay, from a revenue perspective, though, if we say, call it, you know, 20 million in third quarter, 20 million in the fourth quarter, something like that, that implies an exit rate of, like, call it 80 million. Is that the right way we should be thinking about it into 2027?

Jag Reddy | President and Chief Executive Officer

Yeah, I think that's a pretty good assumption, Tim.

Sam Karlovan | Analyst, William Blair

Okay, got it. That's helpful. I will leave it there. Thanks, guys.

Thank you. Operator | Operator

Our next question comes from Andrew Kaplowitz from Citi. Your line is open, Andrew.

Please go ahead. Natalia | Analyst, Citi

Hi, good morning. This is Natalia on behalf of Andy Kaplowitz.

Jag Reddy | President and Chief Executive Officer

Morning, Natalia.

Natalia | Analyst, Citi

Maybe just first question on data centers, right? As data centers and critical power segments grows, and represents more than 20% of revenue, should investors expect more customer concentration to increase as well, or is the opportunity pipeline diversified across multiple customers within that end market?

Jag Reddy | President and Chief Executive Officer

Yeah, within that end market, it's reasonably diversified. You know, not only we're working with some of the blue chip names in the critical power end market, we also are working with the next tier OEMs within that end market. So I don't expect a significant concentration in that end market for us.

Natalia | Analyst, Citi

Got it. That's helpful. And then just maybe switching over to your construction access end market and then the recovery as well. You're expecting a modest recovery driven by infrastructure spending and potential rate cuts, but Are you already seeing early signs of improvement in customer order patterns or conversations, or is that recovery more of a second half expectation at this point in time?

Jag Reddy | President and Chief Executive Officer

In the construction portion of that end market, we are already seeing the build rates increasing. You have seen public comments from our customers that are bringing back capacity online, bringing back employees online, right? So we're seeing that already hitting our demand and EDI rates. In access, there were some, you know, starts and stops, if you will, with particularly the rental houses increasing their demand in Q4, but then, you know, some softer commentary from our customers on the access side of the van market. So we'll have to wait and see and watch and how access develops. But in general, we are positive on the construction access and market.

Natalia | Analyst, Citi

Great. Thank you. Appreciate it. That's it on my end.

Jag Reddy | President and Chief Executive Officer

Thank you.

Operator | Operator

Our next question comes from Ted Jackson from Northland Securities. Your line is open, Ted.

Please go ahead. Ted Jackson | Analyst, Northland Securities

Thanks. I appreciate it. They came in with 10 questions to ask and checked every one of them off. So anyway, here's a couple for you, Jai. With regards to the 20% of revenue for 26 that they could be coming from data center and power, are you going to be turning down in your legacy business to be able to ramp and hit that? Or is that just on top of what's going on within the footprint that you have for a lot of your legacy businesses? You know, then going even a little further, it's like if we do see a stronger turnaround in, say, commercial vehicles, which, you know, my personal opinion is that we will, you know, we'll preclude you from being able to get any additional business. And then I've got a couple more behind me.

Jag Reddy | President and Chief Executive Officer

Yeah. At this stage, Ted, we believe we have enough capacity to be able to ramp up data center business while we see improved run rates within our legacy business. It's not a question for 2026, I believe. It's really for us to figure out a way to continue to expand our capacity as we go into 2027. Our teams have been working feverishly over the last couple of quarters using our MBX framework to increase throughput, increase productivity. We're bringing on additional shifts in some of our plans. We're hiring more employees in some of our locations. So we're planning accordingly. And at this point, we're not going to have to turn down any of our legacy customer business. But that's something that we will continue to watch. And it also presents us some choices as we're going to 2027, not necessarily for capacity reasons, but perhaps for margin and pricing reasons. So we will continue to evaluate those opportunities as we're going to 2027.

Ted Jackson | Analyst, Northland Securities

Adding shifts is interesting to me. I mean, obviously, employees do. I recall in the past, some of your locations, you only were running at one shift. And honestly, adding additional shifts was kind of difficult because of labor restraints or constraints, excuse me. Where are you in terms of kind of current utilization? Where are you in terms of kind of adding shifts? Um, uh, production shifts, um, and, and what are some of the hurdles that you're having to, you know, overcome to make that happen?

Jag Reddy | President and Chief Executive Officer

Yeah. Um, without the two AccuFab facilities, right. If you exclude them for a second, um, I would say we're still around 55% on a 24 seven equipment capacity basis. Right. So as we ramp up some of these volumes in our legacy, um, factories, we're looking at automation. We're looking at, you know, extending our shift schedules. Not all, but many of our plans coming out of COVID went to a two 10-hour shifts for four days a week, right? So that's, you know, 20 hours a day, four days. But what we're doing is, you know, standardizing our shift schedules across the company. Now we're going to a, you know, three shifts The eight-hour shifts, five days a week, that's one way we can immediately increase our run capacity in these plans. We're looking at automation, as I mentioned. We're looking at weekend shifts. We're looking at third shifts in some of our plans. So, you know, it's a mix of different strategies we're employing depending on where we see capacity needed and then where we see demand coming in.

Ted Jackson | Analyst, Northland Securities

Okay. Going over to when you talk about, you know, having to put resources to ramp up and inferring margins. So we're kind of dancing around all this itself. So it's people, you know, more labor costs. Is there, you know, what other things go into, you know, the resources needed to position yourself to capture this growth that's impacting margins behind, you know, obviously the additional shift?

Jag Reddy | President and Chief Executive Officer

Right. As we mentioned earlier, our traditional program launches would have taken 6 to 18 months in many cases. Now we're having to launch these new programs on a 6 to 12-week basis. I'll give an example. We have one data center customer that in January came to us and then essentially quadrupled their demand for one of the product lines we used to make in Raleigh. So we had to ship that product line to Defiance Ohio, one of our traditionally commercial truck plants. And we went in full force. I was part of a 15-member Kaizen team. I was on the plant floor for a full week figuring out how do we quadruple our output to that plant for that customer. So you know, we're rethinking how do we assemble components? We're rethinking how do we do product flow through the factories? We're rethinking logistics, right? We're having to rethink everything from scratch than what we used to do in any of our previous operations, right? So that needs project management resources. That needs engineering resources. That needs MBX resources. So all of this, we're trying to do this at six different locations, as I just mentioned, right? As we ramp up data center work, right? So that's initial investments we're making. We're obviously having to put in some additional capital to improve productivity. We have most of the capital needed to produce these parts, but additional, sometimes additional capital, new type of machines or automation improves throughput and productivity, right? So we're also thinking about How do we get more volume out of our factories as well for these customers? So those are all the things that we're doing. And all of that is investments we're making upfront.

Ted Jackson | Analyst, Northland Securities

Okay. And then my last question, which is kind of a silly one, but just to make sure, I want to make sure I understand what the term revenue synergies mean. So when you say that, you know, you're going to have 40 to $50 million in there, revenue synergies in 2026? Can you just give me a quick definition of that?

Jag Reddy | President and Chief Executive Officer

Yeah. Anything from a data center customer that is going to be made in a legacy MEC plant. That's how we define that. As we mentioned, you know, last year, the two ACUFAB plants we acquired were at capacity when we acquire them. So, of course, we're trying to drive additional throughput through those two plans, and that's not considered in the cross-selling synergies. That's just productivity improvement of those two plans. But anything we're moving out, increasing volume, and new programs from data center customers they're putting into met plans, you know, that's what we consider across all those energies.

Ted Jackson | Analyst, Northland Securities

Thought I had it right. Just wanted to make sure. That's it for me. Thanks a lot, Jack.

Jag Reddy | President and Chief Executive Officer

Thank you, Ted.

Operator | Operator

We currently have no further questions, so I'd like to hand back to Jack for some closing remarks.

Jag Reddy | President and Chief Executive Officer

Before we conclude, I want to again thank our employees 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're making to position MEC for durable, higher margin growth in the years ahead. We look forward to sharing our continued progress with you. Thank you for joining us today.

Operator | Operator

This concludes today's call. We thank everyone for joining. You may now disconnect your lines. jsPDF 3.0.3 D:20260606090233-00'00'

NYSE:MEC Q3 2025 Earnings Call Transcript Generated on 6/6/2026 Elliott | Conference Call Operator: Hello, everybody, and welcome to the Mayville Engineering Company third quarter 2025 earnings conference call. My name is Elliott, and I'll be coordinating your call today. If you would like to register a question during today's event, please press star 1 on your telephone keypad. I would now like to hand over to Stefan Neely at Valium Advisors.

Please go ahead. Stefan Neely | Valium Advisors

Thank you, operator. On behalf of our entire team, I'd like to welcome you to our third quarter 2025 results conference call. Leading the call today is MEC's President and CEO, Jag 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. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will contain 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 mechinc.com. Following our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Jag.

Jag Reddy | President and Chief Executive Officer

Thank you, Stephan, and good morning, everyone. Our third quarter results reflect the discipline and focus of our team as we navigated persistent demand challenges across our legacy end markets. Despite continued softness from our OEM customers, results were in line with our expectations and we are reaffirming our full year 2025 financial guidance. We have also made significant progress integrating the AccuFab acquisition, which closed at the beginning of the third quarter. Our sales team has already engaged AccuFab's customer base and is leveraging MEC's domestic manufacturing footprint to position us as a preferred partner for leading data center and critical power OEMs. These customers are actively seeking reliable domestic supply chains to support accelerating demand from data center and critical power investments. The integration of AccuFab into MEC now offers a scalable solution that simply was not available six months ago. Our pipeline of qualified opportunities within this market has grown substantially, well above initial expectations, and continues to expand as we demonstrate our ability to deliver rapidly and at scale. Today, we are bidding on more than $100 million in qualified opportunities, many of which extend across our broader MEC footprint. Unlike our traditional markets, where projects typically take over a year or longer to reach production, data center and critical power programs can move from bid to revenue in as little as eight to 12 weeks. To support this momentum, we are repositioning capacity and resources. This is a clear demonstration of the flexibility and strength of our vertically integrated operating model. Looking ahead, this opportunity represents a meaningful shift for MEC. Our revenue synergy expectations from AccuFab have now increased to between $20 million and $30 million in 2026. We also expect this business to yield gross margins of approximately 10 percentage points above our historical average of 15 to 20%. While our legacy and markets remain in a cyclical trough, the emerging opportunity in the data center and critical power market represents an important inflection point as we seek to diversify our revenue base and strengthen our long-term growth profile. Driven by the underlying market growth, significant capital investments in data center and critical power, and our opportunity pipeline, we see a path for this end market to represent 20 to 25% of our total revenues in the coming years. At that level, it has the potential to become one of our largest end markets representing a meaningful step in our strategic diversification of our business toward faster growing and higher margin end markets. Importantly, growth in this end market is expected to be incremental to our legacy markets. we fully expect to continue to meet the needs of our longstanding legacy OEM customers as end market demand recovers. Taken together, we believe this positions MEC for greater resilience and profitability through end market cycles. Now, turning to a review of our legacy markets, commercial vehicle demand has continued to soften in the third quarter, with net sales to this end market declining 24% versus the prior year period. ACT now projects a 28% decline in Class 8 production in 2025, followed by an additional 14% decline in 2026 as tariffs and regulatory uncertainty delay fleet replacement. In contrast, Our construction and access market revenues increased 10.1% year over year during the quarter. This is supported by the AccuFab acquisition and strong non-residential activity. Organic net sales growth in this market was 6.2% in the quarter. We are expecting to see this level of growth continue through the fourth quarter and into 2026. In the power sports market, net sales grew 6.4% year-over-year, driven by transient aluminum-related demand. Agriculture net sales declined 21.8% amid elevator interest rates and lower farm income. Across all our end markets, customer engagement remains strong. During the third quarter, we secured $30 million in new project awards with the data center and critical power customers. Year to date, total award across our legacy markets reached $90 million, nearing our full year target of $100 million as we entered the fourth quarter. Within our legacy and markets, we have continued to expand our share with our commercial vehicle customers as they prepare to launch their next generation models ahead of upcoming EPA regulatory changes. Many of these products support future growth and are scheduled to begin production in 2026 and 2027. In addition to the future expansion in commercial vehicle revenues, we secured a significant award for a next generation product in our aluminum extrusion business, along with additional tube components for a major power generation customer. Lastly, the $30 million within the data center and critical power market secured during the third quarter includes $25 million in cross-selling wins. We achieved significant awards with two major AccuFab customers, covering battery backup cabinets and panels, static transfer switch components, and busway components. Operationally, our teams have been working diligently to respond to shifting demand within our legacy and markets while positioning to meet demand from the developing data center and critical power project pipeline. we are working closely with legacy customers to manage production schedules and capacity commitments. In select cases, we are adjusting pricing and requesting additional volumes to secure capacity availability for future demand. These actions will help mitigate near-term underutilization, though we anticipate certain legacy market demand to remain a headwind through mid-next year, even as new data center and critical power programs ramp. During this transitional period, we expect additional margin pressure as we balance the resources needed for accelerating near-term demand. Turning to capital allocation, third quarter free cash flow was impacted by $3.5 million in non-recurring items. We expect strong cash flow in the fourth quarter and have reaffirmed our full year free cash flow guidance. Consistent with our strategic framework, our top priority remains reducing debt and lowering leverage. In summary, I am encouraged by the progress our team has made by executing our strategy. While legacy markets remain soft, Our agile operating model is enabling us to capitalize on high growth opportunities, all while maintaining financial discipline and operational focus. I am confident that our continued execution will drive improved profitability, enhanced diversification, and sustainable value creation for our shareholders. With that, I would like to turn the call over to Rochelle.

Rachelle Lair | Chief Financial Officer

Thank you, Jag, and good morning, everyone. Total sales for the third quarter increased 6.6% on a year-over-year basis to $144.3 million. Excluding the impact of the AccuFab acquisition, organic net sales declined by 9.1% compared to the prior year period. Our manufacturing margin rate was 11% for the third quarter of 2025 compared to 12.6% for the prior year period. The decrease in our manufacturing margin rate was due to $1.2 million of non-recurring restructuring costs and inventory step-up expense associated with the AccuFab acquisition and lower customer demand in the legacy commercial vehicle and agricultural end markets. This was partially offset by higher margin net sales contribution from the AccuFab acquisition. Excluding the non-recurring costs, our manufacturing margin rate would have been approximately 12% during the quarter. Other selling, general, and administrative expenses were $10.5 million, or 7.3% of net sales for the third quarter of 2025, as compared to $7.6 million or 5.6% of net sales for the same prior year period. The increase in these expenses primarily reflects $0.9 million of non-recurring costs and $1.6 million in incremental SG&A expense, each associated with the ACUFAB acquisition. Long term, we continue to anticipate SG&A to remain at a normalized range of between four and a half to five and a half percent of net sales as end market demand recovers. Interest expense was $3.4 million for the third quarter of 2025 as compared to $2.7 million in the prior year period. The increase was driven by higher borrowings resulting from the AccuFab acquisition partially offset by a lower interest rate relative to the prior year period. Adjusted EBITDA margin was 9.8% in the current quarter as compared to 12.6% for the same prior year period. The decrease in adjusted EBITDA margin was attributable to lower legacy customer demand, partially offset by the impact of the AccuFab acquisition. Turning now to our statement of cash flows and balance sheet. Free cash flow during the third quarter of 2025 was a negative $1.1 million as compared to a positive $15.1 million in the prior year period. As Jag mentioned, free cash flow for the third quarter reflects $3.5 million of non-recurring costs. As of the end of the third quarter of 2025, our net debt, which includes bank debt, financing agreements, finance lease obligations, net of cash and cash equivalents was $214.9 million up from $114.1 million at the end of the third quarter of 2024. Our increased debt resulted in a net leverage ratio of three and a half times as of September 30th. Now turning to a review of our 2025 financial guidance. We are reaffirming our 2025 financial guidance supported by growth and select legacy end markets and stronger than expected demand from the data center and critical power end market. We expect net sales for the full year of 2025 to be between 528 million and $562 million. Adjusted EBITDA of between 49 million to $55 million and free cash flow of between $25 million to $31 million. We expect the fourth quarter to reflect normal seasonality and continued softness in certain legacy markets, most notably commercial vehicle. As a reminder, we have reduced manufacturing days during the fourth quarter due to the holidays. Combined with the ongoing reduction in commercial vehicle production schedules and retaining resources to support the ramp of new data center and critical power programs, we anticipate some margin pressure during the quarter. Despite this, we expect to generate positive free cash flow in the fourth quarter. Consistent with our capital allocation priorities, we plan to use that cash to reduce debt. Looking ahead, we anticipate that softness across certain legacy markets will moderate the pace of debt repayment in 2026. To be clear, we do not expect sustained negative free cash flow. However, as we ramp data center and critical power production, working capital will temporarily increase and we may make selective capital investments in equipment to support these programs. Together with fixed costs under absorption from subdued commercial vehicle demand through the first half of next year, we now expect to achieve a net leverage ratio of three times or lower by the end of 2026. Importantly, we view this as a transitional period. As cash generation strengthens with the recovery in the commercial vehicle market and continued growth in our high-margin, high-velocity markets, we expect to accelerate debt repayment and return to a net leverage profile consistent with our stated long-term target of below 2.5 times. With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.

Elliott | Conference Call Operator

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. First question comes from Ross Aaron Black with William Blair. Your line is open. Please go ahead. Hey, good morning, guys. Thanks for taking the questions.

Jag Reddy | President and Chief Executive Officer

Morning, Ross.

Morning. Ross Aaron Black | Analyst, William Blair

Jag, you know, we started this year and you guys pulled forward your productivity initiatives and realized that's a delicate process, especially when demand cycles are volatile. How do you feel with the rollout thus far? And do you feel that the organization is well positioned for when demand does begin to turn?

Jag Reddy | President and Chief Executive Officer

Absolutely Ross, the team has been relentless in driving MBX programs across our plant network throughout the year. Every single plant has had increased number of lean activities throughout the year as we reconfigured our capacity to position data center products into existing footprint. We have done. a lot of adjustments to resources, a lot of adjustments to our equipment, a lot of adjustments to how we think about shift schedules. So all of these actions are not only helping us in the short term to navigate the soft and market demand, but absolutely will position the company for a significant margin expansion, significant productivity once the volumes return, right? I'm really excited about, you know, all the things that we have done this year, though it may not be reflected in our actual financial results. But as we start putting in volumes back into the plant, even with the data center products, right, we should see going into Q1 and beyond a good update in our productivity.

Ross Aaron Black | Analyst, William Blair

Okay. And if I was to put that into a, you know, a spreadsheet here and just make it through margins, Decker metals were down over 30% in the quarter. What is kind of your timeline for closing that gap to, you know, keeping a sustained incremental under 20% through cycle?

Jag Reddy | President and Chief Executive Officer

I would say, yeah, obviously we're not providing any guidance for 2026. Having said that, I would say by mid year, um, we should see a decent readout coming out of all the actions that we have taken. Um, let me address a big elephant in the room. we are taking a conservative approach to our 2026 CV forecast. You can look at our two large OEMs. They're public. And then what they have said publicly for 2026 guidance in terms of volumes. And you can look at ACT. ACT is around 205. And if you average what the customers have said, that's probably somewhere in the two... 45 to 250 range. So the difference is what is going to make, you know, is going to be, I guess, really make a difference next year for us. We have taken the conservative approach of using the ACT for planning purposes. So if the volume turns about the ACT number next year, that's an upside for us, not only in terms of productivity and margin expansion, but also significant revenue increase next year.

Ross Aaron Black | Analyst, William Blair

Okay, yeah, definitely understood. And thanks for providing that framework for 2026. Definitely understand it's, you know, loose and not when you guys do it. So I'll pass it along.

Jag Reddy | President and Chief Executive Officer

Thank you.

Elliott | Conference Call Operator

We now turn to Greg Palm with Craig Hallam. Your line is open.

Please go ahead. Greg Palm | Analyst, Craig Hallum

Yeah, thanks. Good morning. Hi, Jack. Hi, Rochelle. Morning, Greg. Can you just give us some sense on what's occurred in the last four months since AccuFab? I mean, it just sounds like overall activity, it's been a lot higher. It's occurred much faster than initially thought. And what types of internal changes or investments do you have to make? Are you making to capitalize on this opportunity within data centers?

Jag Reddy | President and Chief Executive Officer

A really good question, Greg. We have been extremely busy and active in not only bringing our new customers to AccuFab, but also a lot of new customers to legacy Mac locations. We have hosted every top customer in data center and critical power segment in many of our plans, and they continue to be impressed with the level of capacity and automation and the skill sets that MEC can bring to this end market. So as we came out of Q3, we continue to build on that pipeline. We said in our prepared remarks, our pipeline exceeds $100 million. This is qualified, active pipeline. We have won $30 million. Out of the $30 million, it's really $25 million is the cross-selling synergies that we're actively putting into existing plants. A lot of the programs are going into our Defiance plant, which is primarily a CV plant. A lot of programs are going into Mayville. That is a primarily agriculture and power sports plant. We're putting products into other locations as well where we see immediate benefit as soon as we ramp these data center products, immediate benefit in terms of volume and productivity in those plans that are lacking in volume today. At the same time, we continue to host new customers in the space. We continue to navigate some of the accelerated product launch, you know, Timelines, if you recall, our legacy programs take between 12 and 24 months once we win them to start up and see a revenue. Data center products are 8 to 12 weeks. Once they make a decision and award that purchase order to us, within 8 to 12 weeks, we're making product and shipping this product. That means we are repositioning resources, we're repositioning capital, we're repositioning machinery. We're moving machines from plant to plant to fully be prepared for this increase in volumes that we're expecting out of the data center and market.

Greg Palm | Analyst, Craig Hallum

Okay. Appreciate that, Collar. And I guess maybe can you help us understand, like, what constitutes a pipeline, you know, just versus, you know, non-qualified opportunities. And I'm curious, if you look at, you have a slide that's talking about actual orders. I'm curious, you know, in terms of the customer characterization, how many of those are from new customers? What would these orders have looked like under, you know, ACUFAB as a standalone if they were existing customers? And, you know, just thinking about the future of you know, potential for follow-on orders if some of these are sort of initial orders from new customers? I'm curious just to get your thoughts there, too.

Jag Reddy | President and Chief Executive Officer

Yeah, that's a really good question. AccuFab, through AliLocation, which was primarily the data center and critical power location, they were sold out. So pretty much everything that you're seeing on this slide, the 25 million of cross-selling synergies, most of that they would not have had capacity to actually produce. So that is the exciting part here is that battery backup cabinet, they might have been able to handle one to two million at best in that plant. Now we're able to completely take over that program. And we expect that program to continue on, even though we have a purchase order for 10 million, we expect that to increase as the year goes along next year. So that's the same case with power distribution units. Extrusion panels and busway components. Busway components are really around aluminum extrusions, which AcuFab did not have any capacity for. We're going to produce these out of our fondle accessibility. So this is the exciting part about this acquisition is that we're capturing everything AcuFab could capture and then all of this is really icing on the cake because, you know, we're able to then now put all of these programs into MEC legacy plants. Also, some of these products here in the pipeline, as an example, products that ACCUPEP has never made. So those products, you know, we are able to manufacture because of either size limitations capability limitations, machinery limitations that AccuFab would not have even bid on in the past. So now Mac is able to bid and win in the future some of these larger programs and larger physically in size and complexity.

Greg Palm | Analyst, Craig Hallum

And are you able to sort of tell us what types of customers are they? How big are they? How much data center stuff are they doing themselves? And just to be clear, What we're talking about here, how many is new versus legacy customers to AccuFab?

Jag Reddy | President and Chief Executive Officer

I would say that a significant number of maybe three-quarters of what we have won here are more are legacy AccuFab customers. And in the opportunity pipeline, I would say at least a third, if not more, hire our new logos to AccuPab and Mac. So we're not stopping at just capturing incremental share wallet from existing AccuPab customers. We're actually expanding our logo list, if you will, and going after new customers in that space. So as an example, this data center customer on this slide you're looking at, right, you know, the one customer, that's a $20-plus billion in sales customer. The exclusions, the two customers, each of them, one is probably a couple of billion in size, the other one is 20 plus billion in revenue. Critical Power, the six customers, these are multi-billion dollar revenue customers, right? So these are large customers significantly expanding their presence in the data center and critical power space and looking for additional capacity to continue to grow.

Greg Palm | Analyst, Craig Hallum

Okay, perfect. Last one for me because, you know, you provided some good color by segment for fiscal 26, but there's a lot moving along around in this data center critical power segment. So just given the organic growth, ACUFAB, synergies, I mean, you're at an annualized $90 million rate in Q3. What is your expectation for revenue in this segment in fiscal 26?

Jag Reddy | President and Chief Executive Officer

In data centers?

Greg Palm | Analyst, Craig Hallum

Yes.

Jag Reddy | President and Chief Executive Officer

Okay. We don't, obviously, we're not providing any guidance for 26. And, you know, I'm not trying to be flippant about it, Greg. Every single day, a new program is, every single week, right, a new program is being added to that qualified pipeline. It has been so dynamic. We did not expect to win $30 million of new business in Q3, right? And here we are, right? We already won some more in October, right? We expect to win some more in Q4. So, you know, I would say if I were to take a rough guess, we expect the data center and critical power end market, to be at least 20% of our overall sales in 2026. Obviously, the caveat there is what the CV market is gonna do because that's a significantly large end market. If CV stays around 205 number, we expect data center to be at 20% end market for us next year.

Greg Palm | Analyst, Craig Hallum

Wow, okay. Good to hear. Appreciate all the color. I'll hop back in queue, thanks.

Jag Reddy | President and Chief Executive Officer

Thank you.

Elliott | Conference Call Operator

We now turn to Mike Schliske with DA Davidson. The line is open.

Please go ahead. Mike Schliske | Analyst, DA Davidson

Good morning, and thank you. I want to follow up on a couple of the comments that you've made so far, Jag, on the CV market for 2026. The ACT research forecast, the two OEMs you mentioned. I want to throw out there that all the end users of trucks that I've heard from, not one has mentioned buying less trucks in 2026. That's mostly vocational. Even on the freight side, a lot of folks just set out 2025 and literally bought zero trucks. So any one truck next year would be an increase for a lot of those players. I guess I wanted to figure out, have you talked to any of the OEMs? And could you maybe share at a very high level what their actual comments have been directly to you about what to make sure you're ready for in 2026?

Jag Reddy | President and Chief Executive Officer

Good question, Mike. We have been burned by this end market in the last 12 months, significantly burned by this end market. So if we're being a little gun shy, if we're being a little conservative, hopefully you guys can give us some grace on that. Because if I were to listen to everything the OEM has said to us, or the last nine months, right, we would have been in much worse situation than, you know, we ended up in 2025. I know that we called as we saw it coming out of Q2, and many of you, right, you know, picked on us a little bit that we were being too conservative. In the end, Mac was right about this end market because, you know, we get to see you know, daily, weekly EDIs, we get to see the build rates on a daily, weekly basis of what the OEMs are actually doing, right? So, I mean, your numbers that you referenced and what they have publicly commented, all three of them, three public, you know, OEMs, do I trust those numbers? I don't, because I don't see that in the current forecast. I don't see that in the current EDI. I don't see that in their build rates. I don't see that in their production rates, right? So, look, you know, if I'm wrong about 205 and the market ends up being 240 or 260, one of those, you know, numbers, great. That's an upside for Mac, right? So, but what this has done for us is to, over the last three months, right, and since our last earnings call, we were able to go in And it take out cost out of our factories. Six CV focused plants that we have. We were able to take costs out. We were able to take shifts out. We were able to take, you know, other resources out and redirect resources and capacity to data center and market, right? So as I mentioned, a couple of plants that we're putting data center products in, those are CV plans, right? So this has given the opportunity for MAC to reconfigure our production capacity, reconfigure our resources, and if the volumes come back next year, great, right? That's just an upside for us. So I still feel the call we made at the end of Q2 and the call we're making on ACT number today might be conservative, but it has really helped MAC to look at our cost structure, look at our capacity, and reorganize us as a company.

Mike Schliske | Analyst, DA Davidson

Got it. That's great, Collar. I really appreciate that. And perhaps a very similar question on the ag sector as well. Your comments on it being a back half 2026, just any comments you've heard. I guess the EDI isn't suggesting a good start to the year, at least what you've learned so far. Is that true? And again, have you heard anything from the OEMs directly as to what Jag Reddy | President and Chief Executive Officer: You should be prepared for and being ready for it. Right. At least, you know, the good news on the ag side is, if there is any, OEMs are at least being honest and OEMs are at least being transparent with us on what they see and they don't see a recovery in 2026. Perhaps maybe a little bit of flattening out in second half, but still, right, we're calling a low single-digit decline.

Mike Schliske | Analyst, DA Davidson

uh in ag next year and that is consistent with the information that we've received from our ag oems okay um you've also commented on the last few quarters about sort of getting market share uh tariff related contract pickups or opportunities across cv and construction ag elsewhere something else on do you think um you could outperform the broader end markets next year with some new projects, stuff in the pipeline beyond data centers that maybe you can discuss that might come to the fore in our 2020?

Jag Reddy | President and Chief Executive Officer

If you look at the slide we have on the deck, right, on the market slide, we have consistently outperformed our end markets. Yes, the negative bars are not great to look at. I recognize that. But if you look at the market downturn, any of these end markets, we have outperformed the end markets. So that's because we continue to win new programs in CV and ag and construction and military and every other end market. So I expect whatever the end market is going to do next year, we're going to outperform that because we have programs that are starting up in 2026 and 2027 that we're already working on, as I mentioned earlier, These are 12 to 18 month startups, right? So we're in the middle of significant new program startups. So you know, 2026 and 2027 will be, again, another outperformance year for Mac in some of these end markets. So 26 will be a transition year, as we navigate, putting in a lot of the data center work into some of our legacy plans, and reconfigure resources, we can't lay out a whole bunch of people in Q4 and then expect them to be there in Q1 when the data center projects ramp up, right? So there's, you know, a bit of a transition here in the next one to two quarters. But, you know, we do expect to outperform all of our end markets next year.

Mike Schliske | Analyst, DA Davidson

Great. Thanks so much.

I appreciate it. Jag Reddy | President and Chief Executive Officer

Thanks, Mike.

Elliott | Conference Call Operator

We now turn to Ted Jackson with Northland Securities. Your line is open.

Please go ahead. Ted Jackson | Analyst, Northland Securities

Thanks. Most of my big ones have been asked, but a couple of smaller ones. It sounds like this acquisition is going to be a winner, just going to say it. Question-wise, first of all, with regards to the CapEx spend and working capital needs to bring this data center vision to fruition, can you talk a bit about what are the things that you need to put in place in terms of equipment Jag Reddy | President and Chief Executive Officer: maybe some kind of rough understanding in terms of what that means for capital spend next year and um and then the timeline for it i think my first question sure um we don't anticipate significant capex increase ted next year to accommodate some of these programs i say that with that existing what the existing pipeline is informing us We might on the margin, we might go spend on a handful of machines that will help us produce these products faster or more efficiently. We have 90 plus percent of the assets required to produce these programs internally today. So that is the great news about the synergies with this acquisition is that we have the footprint, we have the manpower, and we have the majority of the assets required. Having said that, even though we're not providing any guidance right now, I think we do have it on one of our CAPEX slides. We expect to be in the $15 to $20 million range for our CAPEX next year. So that is a bit of an increase from 2025. And as we have indicated, we're going to be at the low end of the 2025 range for this year. And right now, we do anticipate a slight increase to that CAPEX spend next year.

Ted Jackson | Analyst, Northland Securities

Okay. Shifting over to construction and access. You know, you had a nice quarter with it. You know, I know you have a fair amount of exposure within access, mainly aerials and stuff, which is a market that looks like it's kind of bottomed out at this point. So my question is, when I look into, or you look into that business, I mean, is what you're seeing in there, you know, like a bottoming out of the access side of things, or is it um more an improvement outside of access maybe some color on that and then maybe some you know you know kind of you know uh perspective in terms of what you're thinking about that with regards to rolling through fourth quarter and 26 because you know i listen to a lot of these oems and it sounds like there's been a lessening of pricing pressure at least within the larger you know construction equipment market and inventories are lined up reasonably well with demand so kind of just maybe some soft, you know, color with regards to your outlier beyond the physical, you know, where we're at.

Jag Reddy | President and Chief Executive Officer

Yeah. In construction access, we're roughly 50-50, 45-55, right? In access in particular, I think some of the demand is being driven by non-residential construction and data center construction. If you listen to the rental companies, I think out of the three rental companies, one of them is on a heavy capital spend. I believe that is one of the reasons why we saw a demand increase from our OEM. At the same time, two other rental companies, right, they're going through some transition. One trying to come to the U.S. with an IPO and, you know, so other acquisition transition, inventory cleanup. So we have to wait and see what the other two rental companies are going to do. But certainly, right, one of the rental companies that is doing well and spending money right now is mostly driven by data center construction. That's what's been helpful. Certainly in our Q3, we will wait and see how that transitions going into next year. Construction, again, hopefully with interest rate cuts in the coming quarters would help residential and other type of construction for the regular earth movers, the yellows that you can think of in the near term.

Ted Jackson | Analyst, Northland Securities

Okay, and then my last is just on power sports. You know, you put growth up there, but you caveated it that it, you know, sounds like there was some, you know, one-time revenue, you know, that pushed the quarter. If you took that revenue out, how would power sports have performed? I mean, it seems to me from listening to a lot of the guys that play around there that it's not that the business is bottomed out, but the big declines in it seem to have passed. And, you know, you're starting to see, you know, kind of the, you know, the RV side by side, the marine markets all sort of, you know, hit their bottoms. So I guess the question is, you know, moving, removing your kind of one time revenue, how did it perform? And am I correct in feeling that that business or that market is at least finding its, you know, I'm saying its foundation?

Jag Reddy | President and Chief Executive Officer

Yeah. Yeah, I would say that, again, listening to the public comments from some of the OEMs, and know what we're observing, is that right now their production schedules are reasonably aligned with end user demand. That's what we wanted to see. And I think they're finally there. So we do expect flat to up low single digits in 2026 for our sports and market. As you recall, we also brought on some new customers this year. So that's also helping us outperform the market. So if we take out at one time in our transitionary order we got, so if we take that out, we still see flat to slightly up next year.

Ted Jackson | Analyst, Northland Securities

Okay. That's it for me.

Thanks very much. Jag Reddy | President and Chief Executive Officer

Thanks, Ted.

Elliott | Conference Call Operator

As another reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. We now turn to Natalia back with CITI. Your line is open.

Please go ahead. Natalia | Analyst, Citi

Hi, good morning.

Jag Reddy | President and Chief Executive Officer

Morning, Natalia.

Natalia | Analyst, Citi

Maybe I know there's a few questions on your data center and critical power vertical, but just maybe a few more follow-up. You know, you highlighted 20 to 30 million synergy opportunities for 2026 from ACUFAB, but what are some of the key milestones to realize that? And can you also just frame the run rate EBITDA margin profile for this vertical once these synergies are captured?

Jag Reddy | President and Chief Executive Officer

Sure. I think we have on our slide, let's go back. Yeah, this one. Where we listed our wins, the 25 million of revenue synergies, Natalia, you can see that the battery backup cabinet starts to ramp, actually starting to ramp in Q4. And power distribution unit and transfer switches will ramp up starting in first quarter, late January, early February. And then extrusions and busway components, so that is starting to ramp already through first quarter of 2026. So majority of these cross-hailing synergies will see an impact starting in Q1 and a full ramp by Q2. Sorry, what was the second part of your question?

Natalia | Analyst, Citi

Margin. So yes, yes.

Jag Reddy | President and Chief Executive Officer

Yeah, so all of these are 30 plus percent gross margin programs that we just won. I would say that next year, approximately 20% is what I said will be data center and market. All of the 20%, approximately 3%, I would say, would be legacy MAC products that are in the data centers, i.e., power generation, et cetera. So, those are slightly lower margin, and then the remaining here, obviously, is the higher margin.

Natalia | Analyst, Citi

Got it. That's helpful color. And one more question for me. I'm just curious, like, how are you positioning production capacity between Your legacy MECN markets are commercial vehicle agriculture versus high growth data center exposure. I mean, there's an expectation for some of your end markets, you're saying, for like recovery next year. So just curious how you'd balance the production capacity.

Jag Reddy | President and Chief Executive Officer

Right. You know, we're having a lot of conversation with our legacy customers. Since we closed, we have started and shared our growth objectives with them and started by requesting additional volumes. because when their markets come back up, right, you know, they need capacity today. If we reallocate that capacity to data center customers, they're not going to have access to that capacity. So next steps, you know, to that conversation, if volumes don't materialize, will involve commercial pricing. So many of these discussions are just starting and are in early stages, and we'll continue to have those conversations with these customers.

Natalia | Analyst, Citi

All right.

That's helpful. Thank you. Jag Reddy | President and Chief Executive Officer

Thank you.

Elliott | Conference Call Operator

We have no further questions, so I'll now hand back to Jack Reddy for any final remarks.

Jag Reddy | President and Chief Executive Officer

Before we conclude, I want to thank again our employees 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're 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.

Elliott | Conference Call Operator

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines. jsPDF 3.0.3 D:20260606090234-00'00'