Mayville Engineering (MEC) Earnings Transcript

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Date

Wednesday, August 6, 2025 at 10 a.m. ET

Call participants

President and Chief Executive Officer — Jag Reddy

Chief Financial Officer — Rachele Lehr

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Risks

Commercial vehicle production is projected to decline by 24% in 2025 compared to 2024, withMayville Engineering Company(NYSE:MEC) no longer anticipating a second-half recovery in market demand for this segment.

Net sales (GAAP) decreased by 19.1% year-over-year to $132.3 million in fiscal Q2 2025, driven by soft customer demand and ongoing channel inventory destocking in key end markets.

Adjusted EBITDA margin declined 170 basis points to 10.3% in fiscal Q2 2025 from the prior-year period, primarily reflecting lower customer demand.

Legacy 2026 financial targets were withdrawn due to macroeconomic uncertainty, reduced demand projections, and volatility across end markets.

Takeaways

Net sales-- $132.3 million in total sales in fiscal Q2 2025, representing a 19.1% year-over-year decrease due to soft customer demand across most key end markets and channel inventory destocking.

Adjusted EBITDA-- Adjusted EBITDA was $13.7 million in fiscal Q2 2025, compared to $19.6 million in the prior-year period; adjusted EBITDA margin fell to 10.3% from 12% year-over-year in fiscal Q2 2025.

Free cash flow-- $12.5 million in free cash flow, with a 92% conversion of adjusted EBITDA in fiscal Q2 2025, reflecting lower cash from operations in 2025, partially offset by reduced capital expenditures.

Manufacturing margin-- $13.6 million at a margin rate of 10.3%, down from $22.3 million at 13.6% in the prior-year period in fiscal Q2 2025 due to lower fixed cost absorption.

SG&A expense-- $10.3 million, or 7.8% of net sales, up from $8.3 million, or 5% of net sales in the prior-year period. The increase was driven by one-time AccuFab acquisition and CFO transition costs in fiscal Q2 2025.

AccuFab acquisition-- Completed in July, expanding Mayville Engineering Company's serviceable addressable market by approximately 60% to about $8 billion, and diversifying into critical power and data center end markets.

Guidance update-- Full-year 2025 guidance updated to revenue of $528 million-$562 million, adjusted EBITDA of $49 million-$55 million, and free cash flow of $25 million-$31 million, including $28 million-$32 million in incremental AccuFab revenue for fiscal year 2025 and $6 million-$8 million in incremental adjusted EBITDA associated with the AccuFab acquisition included in 2025 guidance.

Pro forma net leverage-- Pro forma net leverage increased to approximately 3.1 times following the AccuFab acquisition, with a target to reduce pro forma net leverage below 2 times by the end of 2026 by prioritizing free cash flow for debt repayment.

Share repurchases-- $2.9 million of common stock repurchased in fiscal Q2 2025 and $4.6 million in share repurchases year-to-date, nearing the annual commitment of $5 million-$6 million in share repurchases.

New business awards-- Tracking ahead of pace for the 2025 annual goal of $100 million in new business awards; secured the first cross-selling win after the AccuFab acquisition, with a data center fabrications award to launch in fiscal Q3 2025.

Critical power and data center reporting-- Revenues from these segments will be separately reported starting in the third quarter, expected to comprise about 10% of trailing twelve-month revenue as of fiscal Q3 2025.

Fixed cost reduction initiatives-- Consolidating three warehouses and one manufacturing facility over the next 6-18 months; a $5 million-$7 million one-time cost will yield about $2 million in annual fixed cost savings (as disclosed in the company's fiscal Q2 2025 earnings call).

Cost improvements-- 2025 adjusted EBITDA guidance includes a $1 million–$2 million benefit from cost improvements, net of inflationary pressures.

AccuFab synergies-- Expected $5 million-$10 million revenue synergies from the AccuFab acquisition in 2026, two years ahead of initial projections.

Summary

Management withdrew previously issued 2026 financial targets, citing ongoing uncertainty and muted demand trends within key legacy end markets, particularly commercial vehicles. The recently closed AccuFab acquisition expands market access and diversifies the business into secular growth areas, with management emphasizing near-term revenue and cost synergy opportunities. New end-market reporting for critical power and data centers begins next quarter, reflecting a realignment in customer and product mix. Company leaders highlighted that fixed cost consolidation actions are underway, expected to improve operating leverage and flexibility as volumes recover. Finally, capital allocation remains focused on debt reduction as net leverage has risen post-acquisition.

Jag Reddy stated, "We have secured our first cross-selling win after the AccuFab acquisition. This will launch in [fiscal Q3 2025] and generate revenue for Mayville Engineering Company in 2025. The new data center fabrication business is already set to contribute revenue in 2025."

Rachele Lehr confirmed, "We now expect net sales for the full year 2025 to be between $528 million and $562 million, fully incorporating expected contributions from AccuFab under current demand conditions."

Management projects that by 2028, AccuFab revenues could reach approximately $100 million, and cross-selling synergies may exceed $20 million by 2028 if internal plans are successfully executed.

Company guidance for 2025 assumes no second-half recovery in legacy end markets and does not anticipate a significant pre-buy in the commercial vehicle segment in either 2025 or 2026.

Industry glossary

Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for non-recurring or non-cash items; used to measure operating performance.

Serviceable addressable market (SAM): The segment of the total market a company can serve with its current products and capabilities.

MBX framework: Mayville Engineering Company's proprietary operational excellence framework focused on value creation and margin improvement.

Cross-selling win: New business generated by selling products or services from an acquired company (AccuFab) into existing or adjacent customer bases.

Decremental margin: The ratio that measures the decline in operating profit for each dollar decrease in revenue; used to assess cost flexibility and operating leverage.

Pro forma net leverage: The ratio of net debt to adjusted EBITDA, calculated as if recent acquisitions or significant changes are already reflected in historical results.

Full Conference Call Transcript

Jag Reddy: Thank you, Stefan, and good morning, everyone. During the second quarter, we remained focused on executing our MBX value creation framework. Notably, our adjusted EBITDA margin expanded by 130 basis points sequentially despite a 2% decline in net sales. These results underscore the effectiveness of our cost management initiatives and our team's disciplined approach to improving operating leverage. As previously announced, we completed the acquisition of AccuFab in July. This transaction represents a significant milestone in our transformation. As we continue to execute our commercial growth strategy, we remain focused on increasing share of wallet with existing customers and expanding into high-growth adjacent end markets to diversify both our revenue base and customer mix.

The addition of AccuFab provides diversification into the critical power and data center end market. These are two segments with compelling long-term secular tailwinds. While the transaction will be modestly accretive to earnings this year, a broader opportunity lies in market access and platform leverage addressing unfulfilled demand. This acquisition increases our estimated serviceable addressable market by approximately 60% to approximately $8 billion. In addition, we see meaningful near-term opportunities to drive both revenue and cost synergies by leveraging our proven integration playbook and implementing our MBX framework. We have already begun executing with strong momentum as the team has deployed lean events at both locations.

For reference, over the two-year period, MidStage Aluminum or MSA, our implementation of the MBX framework has improved their adjusted EBITDA margins from approximately 20% to over 30%. This is well ahead of our initial expectations. Furthermore, MSA has been a source of growth within our business even in the current environment as sales have grown an average of 8.4% through 2025. Given AccuFab's high-value commercial opportunities within rapidly growing end markets, we look forward to unlocking the growth and value creation through this acquisition. Looking ahead, we have updated our 2025 financial guidance to reflect both the contribution of the AccuFab acquisition and the demand environment in our core end markets.

Since our last earnings call, customer orders in the majority of our key end markets have remained soft. Many customers, particularly in the commercial vehicle, power sports, and agriculture markets, continue to scale back production capacity. Although channel inventory levels in select end markets have shown modest improvement over the past six months, soft end-user demand is prolonging the duration of the cycles. The commercial vehicle market, specifically, elevated inventory levels persist amid ongoing uncertainties surrounding 2027 EPA regulations and pre-buy timing that was previously expected later this year. Reflecting this, the most recent ACT forecast projects 2025 commercial vehicle production at approximately 252,000 units, a 24% decline compared to 2024.

This weaker outlook is consistent with the order patterns we are currently seeing from our customers. Given these trends, we are no longer expecting a second-half recovery in market demand. That said, we remain focused on what we can control. We have recently launched initiatives aimed at further reducing our fixed cost base, rationalizing asset capacity to optimize our manufacturing footprint. These actions are intended to improve our operating leverage over time without compromising our workforce and ability to scale production once demand begins to recover. Turning now to an overview of substantial new business wins during the second quarter.

I am pleased to share that our team is tracking ahead of pace to achieve our annual goal of $100 million in new business awards for the year. First, we are excited to share that we have secured our first cross-selling win after the acquisition of AccuFab. We were able to quickly capitalize on the strength of the market, securing an award for data center fabrications. This will launch in the third quarter and generate revenues for Mayville Engineering Company, Inc. this year. Building on strategic wins last quarter, we further expanded our market share with our access customer as they shift their global supply base. Our US manufacturing footprint near this customer remains a key differentiator.

We secured additional commercial vehicle wins tied to the 2026 and 2027 model updates driven by the upcoming regulation changes. Further market share in the quarters ahead. Within the critical power end market, we continue to see additional wins related to power generation, securing multiple awards for engine programs launching during the fourth quarter. Related to specific applications for additional battery thermal management units. We have continued to build out this product line as our relationship with this customer continues to grow. These wins further reinforce the strength of our comprehensive offering and fully domestic manufacturing footprint. Despite broader market softness, we continue to secure new awards and have not lost any significant customer programs.

As we deepen relationships within AccuFab's customer base, we see meaningful opportunities to accelerate growth in high-value markets that remain underserved. Our continued emphasis on working capital efficiency generated $12.5 million in free cash flow, resulting in free cash flow conversion of 92% of adjusted EBITDA during the second quarter. Consistent with our capital allocation framework, we deployed this cash flow toward the repayment of debt and planned share repurchases. Following the closing of the AccuFab acquisition, our pro forma net leverage increased to approximately 3.1 times, up from 1.4x at the end of the second quarter.

Our primary focus will be on utilizing free cash flow to repay our debt, targeting below two times by the end of the year 2026. We repurchased $2.9 million of common stock under our share repurchase program during the quarter. Year to date, we have repurchased $4.6 million. This is near our previously announced annual commitment of $5 to $6 million, offsetting the dilution from our annual stock compensation awards. Beyond our minimum repurchase threshold, we will evaluate additional repurchases using a returns-based approach to opportunities to grow our business. I want to address our 2026 financial targets. Given the current macro environment, we are withdrawing the 2026 targets issued at our 2023 Investor Day.

These prior targets assumed a normalized market demand environment. That said, we continue to believe the financial profile implied by those targets is achievable once demand normalizes, even before factoring strategic benefits of the AccuFab acquisition. Looking beyond 2025, we are focused on building Mayville Engineering Company, Inc. into a scaled, diversified domestic fabricator. We believe our platform can ultimately achieve $1 billion in revenue and adjusted EBITDA margins exceeding 15%. We believe this long-term profile reflects the earnings power of our current platform, supported by organic growth, disciplined M&A, and consistent operational execution. As we gain better visibility into a recovery across our core markets, we will share a comprehensive update to our multiyear targets and strategic priorities.

In the meantime, we are excited by the progress we are making with our AccuFab acquisition. Customer engagement has been strong, revealing opportunities we had not originally anticipated. As a result, we expect to recognize $5 million to $10 million of revenue synergies from the acquisition in 2026, two years ahead of schedule. By 2028, we expect that the acquisition could generate the efficacy of our strategy. Our legacy customer relationships continue to provide foundational strength, while our expansion into high-growth, high-value adjacent markets is accelerating the transformation of Mayville Engineering Company, Inc. into a more balanced, high-margin platform. With reassuring trends gaining momentum, we believe our US-based manufacturing footprint provides us with a durable competitive advantage.

As we exit this down cycle, we are confident that Mayville Engineering Company, Inc. is uniquely positioned to deliver above-market growth and profitability. I am incredibly proud of the progress our team has made and remain confident in our ability to deliver sustainable long-term value for both our customers and shareholders. The MBX framework is enabling us to improve our operating leverage and prepare for the next phase of growth. With that, I will now turn the call over to Rachele to review our financial results.

Rachele Lehr: Thank you, Jag, and good morning, everyone. Total sales for the second quarter decreased 19.1% on a year-over-year basis to $132.3 million. Soft customer demand across most of the company's key end markets and channel inventory destocking was partially offset by volume from new projects and demand for aluminum extrusions in the other end market, and increased aftermarket demand in the military end market. Our manufacturing margin was $13.6 million in the second quarter, as compared to $22.3 million in the same prior year period. The decrease was primarily driven by lower customer demand, partially offset by cost reduction activities. Our manufacturing margin rate was 10.3% for 2025, compared to 13.6% for the prior year period.

The decrease in our manufacturing margin rate was attributable to lower fixed cost absorption from lower sales, partially offset by cost reduction actions. Other selling, general, and administrative expenses were $10.3 million for 2025, or 7.8% of net sales, as compared to $8.3 million for the same prior year period, or 5% of net sales. The increase in these expenses during the second quarter primarily reflects non-recurring costs associated with the AccuFab acquisition and CFO transition. As part of the ongoing integration efforts, we expect that our operating expenses during the second half of the year will reflect approximately $2 million in integration expenses.

Outside of these one-time costs, we continue to target our long-term SG&A to remain in a normalized range of between 4.5% to 5.5% of sales. Interest expense was $1.4 million for 2025, as compared to $3 million in the prior year period due to a decrease in borrowings and lower interest rates relative to the second quarter of last year. Adjusted EBITDA for the second quarter was $13.7 million versus $19.6 million for the same prior year period. Adjusted EBITDA margin percent decreased by 170 basis points to 10.3% in the current quarter, as compared to 12% for the same prior year period.

The decrease in our adjusted EBITDA margin was attributable to lower customer demand, partially offset by cost rationalization. Turning now to our statement of cash flows and balance sheet. Free cash flow during 2025 was $12.5 million, as compared to $19.2 million in the prior year period. The decrease in free cash flow as compared to the prior year reflects less cash generated from operating activities, partially offset by a reduction in capital expenditures. As of the end of 2025, our debt, which includes bank debt, financing agreements, and finance lease obligations, was $72 million, down from $125.4 million at the end of 2024, and resulted in a net leverage ratio of 1.4 times as of June 30.

Additionally, on June 26, we entered into the first amendment to our amended restated credit agreement. The first amendment provides for an additional $100 million of availability under the credit facility by exercising the previously available $100 million accordion feature. I would also note that our credit agreement includes a four-quarter leverage holiday following an acquisition, increasing our maximum net leverage ratio to four for the next year. Now turning to a review of our 2025 financial guidance. We are updating our 2025 financial guidance to reflect the expected impact of the AccuFab acquisition and the current demand environment within our legacy end markets.

We now 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. Our updated guidance range includes the expected $28 million to $32 million of incremental revenues and $6 to $8 million of incremental adjusted EBITDA associated with the AccuFab acquisition. I would also note that beginning in the third quarter of this year, we will begin reporting revenues in the critical power and data center end market. We expect this newly reported end market will be approximately 10% of our trailing twelve months revenue.

Additionally, this end market will include a portion of AccuFab customer sales, along with a portion of Mayville Engineering Company, Inc.'s legacy customer sales currently captured within our other end market. As it relates to our legacy end markets, our updated guidance reflects the expectation of demand to remain muted in the majority of our key end markets throughout the remainder of the year. Sequentially, we expect the third quarter revenue to decline low single digits followed by a high single-digit decline in the fourth quarter. Furthermore, embedded within our 2025 adjusted EBITDA guidance is the benefit of $1 to $2 million of cost improvement driven by our MBX operational excellence and strategic value-based pricing initiatives net of inflationary pressures.

As it relates to free cash flow guidance, we expect that our capital expenditures for the year will remain in the range of between $13 and $17 million. Additionally, our free cash flow guidance includes $5 million to $6 million of non-recurring costs related to the CFO transition and the AccuFab acquisition, which will be added back to adjusted EBITDA for reporting purposes. Of these costs, we expect approximately $2 million will be incurred in the second half of the year related to the acquisition. As we previously mentioned, our pro forma net leverage following the completion of the AccuFab acquisition was approximately 3.1 times.

We intend to prioritize the repayment of debt with our available free cash flow, currently targeting below two times by 2026. Lastly, I would like to expand upon Jag's comments regarding our fixed cost reduction initiatives and footprint optimization. Earlier this month, we began the process of consolidating three warehouses and one manufacturing facility into our existing footprint. These actions will occur over the next six to eighteen months aimed at rationalizing our asset capacity without compromising our workforce while enhancing operational flexibility as volumes recover. These four facilities are currently leased, and we expect one-time costs between $5 and $7 million that will yield annual fixed cost savings of approximately $2 million.

With that, operator, that concludes our prepared remarks. Please open the line for questions as we begin our question and answer session.

Operator: Thank you very much. When preparing to ask your question, please ensure your device is unmuted locally. Our first question is from Mike Slisky from D.A. Davidson. Your line is open, Mike. Please go ahead.

Mike Slisky: Okay. Good morning. Thanks for taking my questions here.

Jag Reddy: Good morning, Mike. I guess I will start good morning. Let's start with AccuFab. It's only been about a month. You have owned them a little over a month now.

Mike Slisky: Jag, can you tell us a little about maybe a design through the facility, top of folks, talk with customers a little bit closer now that you own it? In the books closer now that you own it. How do you feel about the lift ahead of you to integrate the company and then get some synergies culture-wise? Just your overall impressions of AccuFab management, the owner.

Jag Reddy: Yeah. As we were planning the close of the transaction, Mike, we put together a playbook for a thirty-six and hundred and eighty-day plan for integration. All the integration activities are on track, and I have been to both the facilities multiple times since the announcement of the transaction, and I have seen both the facilities already working on Lean Kaizens and value stream maps and already planning for operational efficiencies and trying to get more productivity out of these plans. I could not be more excited about AccuFab sitting here. This will be one of the most consequential M&A transactions that the company would have done over our last eighty-year history.

The opportunities commercially that are in front of us have been incredible. We, as we are looking at not just getting more out of current AccuFab facilities, we are also continually talking to our customers, AccuFab customers, on how they can leverage our existing Mayville Engineering Company, Inc. footprint. We talked about the commercial synergies or cross-selling synergies just now. The way we are thinking about AccuFab is that we could see AccuFab revenues to get to approximately $100 million by 2028. And cross-selling synergies to exceed $20 million by 2028. So if we execute our plan as we laid out internally, this will be a home run for us.

And just a commercial opportunity is that, you know, our commercial team has been involved with, you know, even I have been involved with AccuFab customers. I have been really energizing and really exciting for us. So sitting here, I could not be more excited.

Mike Slisky: Great. Thanks for that. I also wanted to just touch on some of the MRHAI outlook and some of the reasons why the outlook was reduced a bit here. You know, as I go through some of your customers' earnings calls the last two weeks, and there are a few to go, including one or two big ones still left, but whoever has gone out there so far, no one's really reduced their outlook all that much. I mean, no one's been all certainly not positive. I haven't seen any kind of major shift downward. So I'm kinda wondering, and it's definitely negative, but just not that bad.

I'm kinda wondering if you've got any thought if you can just give us some thought as to how you came to the conclusion that things were kind of declining a bit here. Is it coming from the OEMs themselves? Is it coming from I guess, you have the AccuSwitch forecast. It's just kinda some of the basis and background as to how you came to this conclusion.

Jag Reddy: Absolutely. The biggest change in our outlook, Mike, is in the commercial vehicle market. When we started the year, and what our guidance was based on, was approximately 320,000 trucks being produced in 2025. And that is closely related to what ACT forecast was at that time. As you know, today, the ACT forecast is down to 252,000 units. I recognize that many of our customers did not publicly indicate, you know, their view of this softness in the marketplace. But at the same time, we have had numerous conversations with our customers.

We have seen the order trends not only in their bookings, through monthly reports from ACT, but also our internal EDI feeds and our internal demand that we're seeing from each of these customers. So let me give you a couple of examples. In the month of July, one of our largest CV customers took out approximately, you know, 35% of their capacity through down days. Similarly, another customer took out about a little over two weeks of production in July. And then a third customer out of their Mexico facility took out all but two days of supply in the month of July. They were essentially shut down the entire month of July.

And in August, sitting here in August, we're seeing a similar already within the first week, this top customer has taken out nine production days in the month of August, and we expect them to take out more production days in the month of August. Similarly, if you look at last year, this one customer was producing in one of their facilities approximately 170 trucks a day today. At least in June 2025, they produced 138 trucks per day. So what the customers are really doing is that they're taking out a significant number of production days on top of that, they're reducing their run rates in each of their plans.

So the days out equates to approximately 25% reduction in their capacity. And then the run rate reduction equates to about 11% reduction in their capacity. So you do that math and look at the ACT forecast, look at their bookings, look at our EDI feed, we don't have a choice but to adjust down the forecast for the CV market. It's 38% of our business. So in good faith, I cannot sit here and then say that, you know, this market is gonna be okay. But also recognize that many of these OEMs have, you know, finance arms. They have spare parts businesses. They have international sales. So I mean, they have other levers they could pull.

And, you know, perhaps that may be the reason why they didn't wanna come off. But certainly, right, you know, that is not our expectation. We feel really good about where we are in terms of our, you know, forecast for the year. And given the uncertainty with tariffs, you know, the uncertainty with freight and freight volumes and freight rates, and more importantly, you know, 2027 regulations. We do not expect a pre-buy in 2025. Even though we're not providing guidance for 2026, we do not expect a pre-buy in 2026 as well.

These all of these data points plus other macro headwinds really prompted us to take the actions on footprint consolidation that we announced today to take place. Right? So we're doing everything we can to control our future and we feel really good about how hard our team is working, really proud of, you know, all the actions we're taking. And really positioning the business for, you know, better leverage better, you know, profitability, once the volumes recover. Sorry. That was a long answer.

Mike Slisky: No. I really appreciate that. And I wouldn't mind a little expansion on it, a little more answer. Can you just give us some similar commentary on, you know, power sports, construction access, and ag? Are the outlooks similarly in the same boat, or were they already down and kinda staying that way?

Jag Reddy: Yeah. So they're a little bit better. Let me get to one at a time.

Mike Slisky: Okay. Good.

Jag Reddy: Okay. Construction access, we feel like we're seeing some level of increases in some product lines. I believe that though the infrastructure funding hasn't really started to flow to the states, we feel good about, you know, where our access revenues look like. And also, we feel pretty good about, you know, some of the data center construction work that's happening across the country. That's driving demand for construction equipment. Agriculture, I think we're absolutely in the trough. And we have had numerous conversations with our customers. We feel like the recovery is probably 2026, perhaps even mid-2026 given the crop prices and the farmers' income, etcetera. But I don't expect the agriculture market to deteriorate any further.

And then last but not least, power sports. You know, it looks like the power sports OEMs have stabilized their inventories in their channels. Even though they have a little bit of work to do, they have at least aligned their consumer demand with their production volumes. So that's really good news. And ag, as you know, already many of the customers have done that. So there's no more channel inventory to be drawn down in agriculture or construction markets. So those three markets, we feel pretty good. A little bit of rate cuts later this year could spark a power sports recovery.

And as we talked about construction agriculture, we do expect that to be stable for construction and agriculture for a recovery next year.

Mike Slisky: Okay. Thanks very much. I beg your give others a chance. I will pass it along. Thank you.

Jag Reddy: Thank you.

Operator: Our next question comes from Ross Sparenblek from William Blair. Your line is open, Ross. Please go ahead.

Ross Sparenblek: Hey, good morning, guys.

Jag Reddy: Morning, Ross.

Ross Sparenblek: Hey. Guys called out SKU rationalization at least within power sports. It looks like there's maybe a $60 million organic decline in the guide for the second half. Can you maybe just help us size what would be potential SKU rationalization that might not come back versus just normal cyclicality?

Jag Reddy: I am not aware of that, Ross. On that comment, let us come back to you. But let me just generally address. I think one of our customers might have into the a brand new product in power sports a lower price side by side and they might be working on some, you know, product line rationalization, but we're not aware of anything specific. But we're happy to get back to you on that.

Ross Sparenblek: Okay. Yeah. I was it was mentioned in the K with the press release. I was just wondering. And then just kinda thinking about destocking, it sounds like you guys have confidence that you have been destocking or you have been building below your customers' destocking rates. The last couple of year or quarters? I mean, we've absorbed a $100 million of again of organic decline. So just trying to get a sense of where the bottom is because I can appreciate tariff uncertainty, and I don't have enough historical context to see how quickly this could turn on a dime.

If your customers come back tomorrow and, you know, demand picks up with the rates or the big, beautiful bill or whatever.

Jag Reddy: Yeah. That's a good question, Ross. You know, in construction, agriculture, I believe the channel inventories have been drawn down and that the end-user demand is aligned with the current production rates for our customers. In power sports, there might be a little bit of work left but I would say less than a quarter's worth of work left. For our customers to completely align with the end market demand in power sports. We're already seeing some green shoots for a couple of our customers in power sports.

So our expectation is that even a small decrease in, you know, maybe even a 50 bps by end of this year, in interest rates cuts could help the power sports market going into next year.

Ross Sparenblek: Okay. And then just one last one for me. Marching cadence for the second half, you know, you guys had, you know, good decrementals around 19%. Tracking towards your kinda 17% threshold of the MBX. But the guide at the midpoint seems to imply, you know, a 35% decline. I don't think this business has ever, you know, produced a 35% decremental. So maybe just some of the moving parts as you think about MBX and, you know, volume coming in.

Rachele Lehr: Certainly, volume absolutely plays a significant part in that, and we haven't seen this level of volumes or decline in volumes in a while. So as that plays through, we are seeing that degradation happen on our decrementals, but we do see that they will return as we look ahead into the future.

Ross Sparenblek: Okay. Yes.

Operator: Our next question comes from Ted Jackson from Northland Securities.

Ted Jackson: Thanks. The main topics I wanted to dig into have been dug into, but let's circle back to commercial vehicles. I mean, you know, the Trump administration has really thrown the whole industry a curveball. And, you know, it's gonna take a while for it to dig out. Is there dealer inventories within commercial vehicle normalized in 2026? And if you think that's the case, how long do you think it would take for that to happen? So I guess what I'm getting around is as you talk to your commercial vehicle customers, and pay attention to that market, you know, like, how bad is the dealer inventory level?

What's the current view in terms of, you know, the timeline it will take for it to normalize? In this question, assumes that we do not see a pre-buy come in 2026. So that's my first question.

Jag Reddy: Yeah. Good question, Ted. Our CV customers are frantically working to align their channel inventories, you know, with end-user demand. One of our customers in their public comments mentioned that even though their channel inventory numbers look like they're high, but a lot of that inventory is actually sitting at the bodybuilders. So that gives me comfort that they can quickly align their production rates to end-user demand. Particularly, as I mentioned, all of their production base that they're taking out in their factories. So that's the intention to quickly align. So I suspect by the end of this year, right, many of our CV customers will get their production aligned with end-user demand.

The bigger question for us is, is there gonna be a pre-buy in 2026? We already called out. It will not be in 2025. So it remains to be seen what the EPA regulations in '27 will do. So we will have to, you know, watch that. Don't have a prediction for 2026. Our internal assumption is that there will not be a 2026 pre-buy. But if there is a pre-buy in 2026, that will be an upside for us.

Ted Jackson: You know, but so your current view, though, would be that commercial vehicle channel inventory, by the time we enter 2026, will be roughly in line with market demand. And then that would mean that we'll have a conceptually, a soft second half of commercial vehicle. And then, you know, for lack of a better term, you know, some kind of if she go through '26, assuming that plays out as you said. Not doesn't involve any kind of pre-buy. It just means that, you know, they'll start producing back to end market demand, and we could see your business, you know, for you know, maybe go back kind of what you were seeing in the first half.

Jag Reddy: That is correct. We were forecasting no recovery in the second half for the CV market.

Ted Jackson: Okay. Then my next question just kinda as going around the different, you know, sort of verticals is, you know, I was actually a little surprised with the revisions to military and other in the second half. And I just kinda wanted a little more color into, you know, what caused the shift in the outlook for both of those businesses? Thanks.

Jag Reddy: Think, you know, there's just a lapping of some of the programs. And other than that, there's nothing major for us to call out in the military segment or the other segment. Other segment, as you know, we pulled out. We will be pulling out some of the data center and critical power revenues out of the other market. And then putting them into the newly called out critical power and data center end market. Let me add to the other market actually.

Ted Jackson: Some of that is just basically a recategorization.

Jag Reddy: In the other market, which is predominantly MSA, Ted, we are seeing, as we called out, right, you know, almost 8% growth in the first half of this year. A significant portion of that is coming through due to the tariffs. You know, aluminum fabrications and extrusions, a lot of our customers and new customers redirecting some of their buys from outside the US to the US, and we have been a beneficiary of that redirect on particularly aluminum applications.

Ted Jackson: Okay. Jag, that's it for me. Thanks for taking my questions.

Jag Reddy: Thanks, Ted.

Operator: As a reminder, our next question comes from Natalia Bak from Citigroup. Your line is open. Please go ahead.

Natalia Bak: Hi, good morning.

Jag Reddy: Morning, Natalia.

Natalia Bak: So first of all, ask, but given your emphasis on reshoring and domestic footprint, right, 92% material sourcing, are there any upcoming contracts or OEM relationships being reshored from competitors? Are anything you can disclose or comment on?

Jag Reddy: We obviously, we will not publicly comment on any of our customer contracts. But as I just mentioned, Natalia, we are seeing a good amount of inflow for both steel and aluminum fabrications that are primarily driven by tariffs. At the same time, many of our aluminum fabrications customers, given a shorter or rather narrow source of supply for aluminum applications, are willing to pull the trigger and make decisions on reshoring aluminum fabrication to the US. And now we are seeing a significant uptick in requests for quotations and also new business at our MSA operation.

At the same time, even though we have been extremely busy answering customers' requests for quotations in our steel fabrications business, many of our customers are still waiting to make the decisions given the continuous change in tariff structures. A lot of our customers get their products from India. A lot of the customers get their products from Vietnam and Thailand and China and many of the other Asian locations. As the tariff continues to be murky, though we have provided a lot of the information, cost information to our customers and price information to our customers, we have not seen many of them make decisions on the steel side of our business.

Natalia Bak: Got it. That's super helpful. And then I know you mentioned you'll start reporting critical power in data center revenue contribution, but what other initiatives are you doing to diversify more meaningfully your, I guess, long-term exposure of all your verticals? Right? Like, are you diversifying more meaningfully toward data centers or military defense? Like, as you think long-term, what is, like, Mayville Engineering Company, Inc.'s strategy or approach to this vertical? And how should we think about it?

Jag Reddy: Absolutely. AccuFab gives us a great opportunity to go explore significant growth in critical power and data center end markets. And we talked about that at length. But let me also give you another picture. In the regular or rather base Mayville Engineering Company, Inc. business, we mentioned that we're ahead of our $100 million new business wins for the year. You know, we entered June at a little over $60 million of new business wins for our, you know, legacy Mayville Engineering Company, Inc. business. At the same time, our pipeline just what we're working on is over $280 million of strategic opportunities for the, you know, Mayville Engineering Company, Inc. based business. Right?

That gives you a picture of, you know, how much opportunity that is in front of us that we're actively working. At the same time, you know, a significant number of our new wins came from either new customers or completely new divisions within our, you know, existing customer base. So our sales team is highly focused on diversifying all of our legacy end markets. We have a lot of business development opportunities that are ongoing that'll help us get into more A&D aerospace and defense, medical, and the data center and critical power applications.

Natalia Bak: That makes sense. And then one last question on my end. You know, in your presentation, you said solid backlog in military, but how sustainable is that backlog proportion is reoccurring aftermarket service versus new programs? Any color would be helpful.

Jag Reddy: Most of our programs will be recurring programs. Think there will be some aftermarket. Generally, we say that 5% of our total revenues are in the aftermarket space. But for the military programs, you know, we're primarily on JLTV, FMTV, and Humvee platforms. Those are our, you know, three large programs that we're on with both I guess, won't name the customers here. Right? You know, you can guess who they are. So those two customers account for the majority of our defense sales. Those programs continue to progress. Given the conflicts around the world and the continuing restocking of US inventories. So we're confident that those programs will continue forward.

Natalia Bak: Alright. Helpful. That's all on my end. Thank you.

Jag Reddy: Thank you.

Operator: We currently have no questions. So I'd like to hand back to Jag Reddy for some closing remarks.

Jag Reddy: Once again, thank you for joining our call. We appreciate your continued support for Mayville Engineering Company, Inc. and we look forward to updating you on our progress next quarter. Should you have any questions, please contact Noel Ryan or Stefan Neely at Valem, our investor relations counsel. This concludes our call today. You may now disconnect.

Operator: Thank you for joining today's call. You may now disconnect your lines.

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