Mayville Engineering Company, Inc. (MEC) Q3 2026 Earnings Call Transcript

Operator: Hello, everyone. Thank you for joining us, and welcome to the 26 Third Quarter Mayville Engineering Company Earnings Call. After today's prepared remarks, we will host a question and answer session. Please press *1 to raise your hand. To withdraw your question, press *1 again. I will now hand the conference over to Stefan Neely with Vallum Advisors. Please go ahead.

Stefan Neely: Thank you, operator. On behalf of our entire team, I would like to welcome you to our third quarter 26 results conference call. Leading the call today is MEC's President and CEO, Jagadeesh A. Reddy and Rachele Lehr, Chief Financial Officer. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements. Due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which is available at mecinc.com. Following our prepared remarks, we will open the line for questions. With that, would like to turn the call over to Jagadeesh.

Jagadeesh A. Reddy: Thank you, Stefan Neely, and good morning, everyone. Our third quarter results were in line with our expectations reflecting strong demand and accelerating project volumes within our data center and critical power end market. Net sales increased approximately 18% year-over-year. This was supported by the continued growth in data center and critical power the ongoing recovery in commercial vehicle and sustained demand in construction and access. In data center and critical power, additional programs reached full production during the quarter improving capacity utilization and driving a sequential improvement in adjusted EBITDA margin of approximately 190 basis points. At the same time, remain in the early stages of ramping the more than $145 million in projects secured in this end market over the past year. The pace and the scale of customer requirements continue to place significant demands on our people, equipment, and organization. On October 1st, we closed on the acquisition of a manufacturing facility in Thompson, Georgia. Executing the capacity strategy we outlined following our second quarter equity offering. I will discuss the facility and our plans with it in more detail shortly. Operational performance across our plants remained uneven during the quarter for 2 distinct reasons. First, at the facilities supporting data center and critical power, customer program timelines, continue to evolve rapidly, requiring our teams to adjust production schedules, and resources in response. We also incurred approximately $3 million of data center and critical power project launch and outsourcing costs along with premium labor costs supporting other customer programs. Second, facilities more heavily weighted towards agriculture and power sports are operating below efficient utilization levels, as customer volumes in those end markets remain soft. We are actively shifting programs across our footprint to better balance workloads, and align our cost structure. This rebalancing takes time, and the resulting underutilization weighed on margins in the quarter. These costs were in line with our expectations though. As discussed on our last call, we continue to view them as temporary. Expect them to moderate gradually as demand continues to accelerate and new awards continue to enter the launch cycle. We expect these ramp related costs to decline through early 27 as equipment on order is delivered outsourced production returns in house, and we continue to fill open positions. Importantly, we are absorbing these near term costs deliberately because the programs we are launching today are accretive to our long term margin profile. Finally, the demand we see today reflects a multiyear investment cycle and we believe MEC remains in early stages of that opportunity. Our products are typically in the later stages of a data center build. This means the programs we are producing today support infrastructure investments that broke ground roughly 3 years ago. Level of investment already committed across the industry combined with our less than 5% penetration among our OEM customers, gives us confidence in the long term demand outlook. While near term sentiment around the data center construction may fluctuate, we remain confident in the durability of this demand and the multiyear growth opportunity ahead of MEC. Moving on to some of our key end markets. Commercial vehicle net sales increased nearly 35% year-over-year, reflecting improved customer demand supported by an increase in North American Class 8 production. ACT continues to project Class 8 production growth of over 8% in 2026. While its outlook for 2027 has moderated, ACT still expects production to increase approximately 9% in 2027. We remain encouraged by current build rates and the activity we are seeing from our customers. In construction and access, net sales increased approximately 9% year-over-year on continued improvement in nonresidential construction demand. We expect this end market to remain a steady contributor as nonresidential activity continues to improve. In power sports, net sales decreased by approximately 27% year-over-year, driven by continued soft customer demand as OEMs in this end market realigned global supply chains. This trend is consistent with our expectations and is likely to persist into 2027. Military remains constrained by ongoing program transition delays and agriculture, remains in a cyclical trough with no near term inflection expected. Both are consistent with the outlook we have shared previously. Within data center and critical power, net sales increased approximately 65% reflecting accelerating demand from current customers and new project launches. This end market represented approximately 22% of total net sales in the quarter. During the quarter, we secured approximately $45 million of new data center and critical power project awards, while our qualified opportunity pipeline now exceeds $200 million. With growing demand, we continue to evaluate opportunities for customers to reserve dedicated capacity as well as arrangements where customers fund certain capital investments required to support their programs. We will continue to manage capacity and production priorities with a focus on sustainable, diversified, and profitable long term growth. These awards secured during the quarter reflect a combination of new customer wins, and continued expansion with existing major customers. These programs span a range of power gen enclosures, switchgear, switchboard enclosures, and uninterrupted power supplies. We continue to expand our share with key commercial vehicle customers as they prepare for upcoming product launches tied to the 2027 EPA regulatory changes. These programs are expected to begin entering production in late 26 and continue ramping into 2027. Beyond commercial vehicle, we secured new business tied to model introductions with an our sports customer while also expanding our business with an agricultural customer. Turning to capital allocation, our focus remains on 3 priorities. Investing in organic growth, continuing to reduce leverage, and pursuing selective accretive acquisitions. First, organic growth. Based on our awarded programs and pipeline, we currently expect to reach full capacity within the next 18 months. We are deploying capital now to expand our footprint ahead of that point. On October 1st, we closed on the acquisition of our Thompson, Georgia facility. Located in the Southeastern United States closer to key data center and critical power customers, this facility establishes a platform for growth in a region where our capacity has been constrained. Together with planned equipment investment, we expect this facility to add approximately $50 million of annual revenue capacity by 2028. This will extend our total revenue capacity beyond the approximately $850 million we previously disclosed. Rachele will cover the associated capital spending, and the return criteria we apply to these investments. Second, deleveraging. We ended the quarter with a net leverage of 2.9x and our long term target remains 2.5x. As volumes ramp, and profitability improves, we expect earnings growth and cash generation to drive continued progress toward that target. Third, accretive M&A We will remain opportunistic in pursuing acquisitions that strengthen our competitive position expand capacity, and support long term value creation. Looking ahead, we are confident in the opportunity in front of us and in our ability to deliver profitable growth in 2027 and beyond. Before I turn the call over to Rachele Lehr, I want to address the trajectory of our margins as we navigate this period of transition for MEC. In the past, we have pointed to an approximately 15% adjusted EBITDA margin as the target for our business. We continue to see a clear path to that level and potentially beyond. That path rests on 4 drivers each of which are already in motion. First, the moderation of ramp related costs as equipment on order is delivered. And placed into service and outsourced work returns in house. Second, improved absorption and operating leverage as our data center and critical power programs continue to ramp toward full production. Given the scale of demand in front of us, we are intentionally adding people, equipment, and capacity ahead of our current levels. As volumes catch up to that resource base, we expect operating leverage to significantly improve. Third, the continued build out of our workforce. Labor availability remains tight in certain facilities. As hiring catches up, we expect to reduce our reliance on premium labor and overtime. Lastly, the normalization of demand in our agriculture and power sports end markets. Lower customer volumes in these markets are pressuring margins through underutilization as I noted earlier. Footprint rebalancing already underway should help offset that and a recovery in those volumes would provide additional margin support. These 4 drivers combined with the continued mix shift toward higher value data center and critical power programs as this end market moves towards 25% of total revenue gives us confidence in that trajectory. We expect to make measurable margin improvement over the next 12 to 18 months and I want to be clear about the shape of that progress. These drivers work on different timelines. Ramp related cost, should moderate first beginning in early 27. Hiring absorption improve as programs reach a run rate over the course of the year. And the timing of recovery in agriculture and power sports will be determined by demand in those end markets. As a result, we expect 2027 to be a year of continued growth with margins improving sequentially rather than in a single step. The benefit of this work will be most visible as we exit the year and move into 2028. We will provide our formal outlook for 2027 on our fourth quarter call. We believe these actions position MEC to deliver attractive sustainable returns on invested capital as we capitalize on a multiyear secular growth opportunity. With that, would like to turn the call over to Rachele.

Rachele Lehr: Thank you, Jagadeesh A. Reddy, and good morning, everyone. Total sales for the third quarter increased 18.1% on a year-over-year basis to $170.4 million Manufacturing margin was $18.8 million or 11% of net sales, compared to $15.9 million or 11% of net sales in the prior year period. The year over year increase in manufacturing margin dollars was primarily attributable to improved capacity utilization driven by higher sales volumes in data center and critical power as well as growth within commercial vehicle and construction and access end markets. This increase was partially offset by $3 million of data center and critical power launch and outsourcing costs and premium labor. Other selling, general, and administrative expenses were $8.8 million compared to $10.5 million in the prior year period. The decrease primarily reflects a decrease in nonrecurring acquisition related expenses and the realization of synergies associated with the AccuFab acquisition. Interest expense was $3 million compared to $3.4 million in the prior year period, due to decreased average borrowings under our revolving credit facility partially offset by higher interest rates in the current period. Adjusted EBITDA was $17 million or 10% of net sales, compared to $14.1 million or 9.8% of net sales in the prior year period. The increase was primarily due to higher sales volume and improved capacity utilization, partially offset by data center and critical power project launch and outsourcing costs and premium labor. On a sequential basis, adjusted EBITDA margin improved by approximately 190 basis points. Turning now to our cash flow and the balance sheet. Free cash flow during the third quarter was a use of $3.3 million as compared to a use of $1.1 million in the prior year period. The decrease was primarily driven by higher capital expenditures related to equipment needed to support rapidly accelerating demand in the data center and critical power end market, partially offset by higher cash flow from operations. As of September 30, our net debt was $146.6 million The ratio of net debt to trailing 12-month adjusted EBITDA calculated per our current credit agreement, was 2.9x. Now turning to a review of our updated outlook for the full year of 2026. For the full year of 2026, we currently expect net sales of between $630 million and $640 million adjusted EBITDA of between $48 million and $50 million and free cash flow use of between $6 million and $16 million This outlook assumes a full year of AccuFab ownership, incremental cross selling revenue, and continued recovery in commercial vehicle and construction and access. Partially offset by ongoing softness in our agriculture and powersports end markets. Our guidance also incorporates the impact of continued launch and outsourcing costs associated with data center and critical power programs along with premium labor. Our updated outlook reflects 2 factors. First, as Jagadeesh noted, customer program timelines in data center and critical power continue to evolve, and the timing of certain project volumes has shifted into early 27. Second, mix within our legacy end markets is weighing on margins. Strong growth in commercial vehicle is occurring alongside continued softness in agriculture and power sports. Where lower volumes are leaving portions of our footprint underutilized. As a result, we expect fourth quarter adjusted EBITDA margin to be modestly below the third quarter level. We view this as a transitional quarter and it does not change the path Jagadeesh outlined. With ramp related costs beginning to moderate in early 27 and margins improving sequentially from there. Free cash flow guidance reflects working capital investment and planned capital expenditures of $25 million to $35 million including the initial investment in the Thompson, Georgia facility. As Jagadeesh mentioned, on October 1, we completed the acquisition of our Thompson, Georgia facility. Inclusive of the purchase price, facility improvements, and production equipment, we currently expect to invest a total of $25 million in the location through 2028. Of that amount, we currently anticipate approximately $10 million of capital expenditures in 2027 with the remaining to be invested in 2028. When fully deployed, the investment is expected to approximately $50 million of annual revenue capacity. The timing of the spending will be aligned with equipment lead times customer demand, and the ramp of awarded programs. We will continue to evaluate each phase of the investment against our established return criteria including an internal rate of return of at least 15%. This phased approach allows us to add capacity as demand develops while maintaining discipline around capital deployment and cash flow. In summary, our third quarter reflected the dynamics Jagadeesh A. Reddy described. Strong volume growth and improving utilization in data center and critical power partially offset by launch costs, and softness in a couple of our legacy end markets. Looking ahead, our focus remains on converting higher volumes into improved profitability and cash flow. While we are not providing 2027 guidance today, we expect that improvement to build gradually over the course of the year. Ramp related costs should moderate first, with the full benefit of improved fixed cost absorption, operating leverage, and footprint rebalancing becoming more reflected in our results by late 27 or early 28. We will pursue that progress while maintaining a disciplined approach to working capital and capital spending. We remain focused on reducing leverage toward our long term target of 2.5x, while funding organic growth opportunities that meet our return criteria. We will also remain selective in evaluating additional opportunities. With that, operator, we are ready to open the line for questions.

Operator: We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. To ask an additional question, you may reenter the queue. You would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *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 standby while we compile the Q and A roster. Your first question from the line of Michael Shlisky with D.A. Davidson. Your line is now open. Please go ahead.

Mike: Yes. Hi. Good morning. Thanks for taking my questions.

Jagadeesh A. Reddy: Good morning, Mike.

Mike: So I wanted to just get a little more detail on the margin improvement that you discussed that will be taking place throughout 2027. I guess I am trying to figure out what is the base or the bottom of the margin progression. Is that what we just saw? Although, I guess, it was up quarter over quarter, but is it what you are supposed to see in the fourth quarter as being that basically you will go up off of? Will there be rough first quarter, second quarter?

Rachele Lehr: Sure. It comes from there up and up in the third and fourth quarter.

Mike: I just want to see the exact trajectory or the ups and downs and where the absolute lowest point of this is.

Rachele Lehr: Hi, Mike. Yeah. So I think you are correct. Q4 as you can see, is going to be down slightly from Q3. That reflects seasonal softness and some of the shifting of the customer time lines, and then we still have the DCP ramp cost. As we move into Q1, we expect to be able to add the capital that we purchased about 6 months ago up and running. And that will allow us then to reduce our outsourcing And then that will also allow us to start reducing our premium labor. So that will happen sequentially, in the first part of the year, such that in the second part of the year, we will have the equipment up and running. We will have the labor to support it, and then we will sequentially improve as data center ramps throughout the rest of the year.

Mike: Okay. So it is you know, Q4, that is that is kind of the base. That was the main question. Thank you for that.

Rachele Lehr: Yes. That is the base. Yes.

Mike: And then secondly, I mean, it is in very fresh news, but wanted to get your comments on what happened in elections last night. I guess it is a 2-part question there. First, any changes within the state of Wisconsin or your other immediate task bases any changes in party or within those states and those jurisdictions that you are looking at or thinking about, then more broadly, you know, there is so many candidates for various positions in congress and governor offices. They made a lot of comments about their terms and critical power as, you know, not being what they wanna see within their states and things along those lines, want to cancel or revoke projects or slow things down, etcetera. Just curious whether you, the projects that you have been working with mean, that you are working with, today, still feel fairly confident about how the data center and physical power build out will take place. Barring the very current, near-term site, timeline changes, but more broadly, do folks still feel confident you think about the broader build out here?

Jagadeesh A. Reddy: Yeah. Great question, Mike. I have been thinking about that. Since yesterday. Going into the election, right, there was significant opposition to data center build out in multiple states. Whether red or blue states did not matter. Right? There was ground swell of opposition to data center build out. But if we all step back and think about it, what was that about? Right? It was really about many of the state governments providing tax breaks to the data center operators but also how the infrastructure. Electrical infrastructure investments were being financed who was paying for it, and then how the electricity costs are being shared, whether the local customers were gonna bear the brunt of that cost increase. Right? So that was the main reason why, you know, many of the states started putting moratoriums, etcetera. But, you know, again, I am not a futurist, but sitting here taking it all in, Right? You know, my--at least the base case is that long term, we need data centers to continue to be built out. No 1 disagrees with that. it is the matter of, you know, what is gonna be the federal policy? What is gonna be the state reactions to sharing of, you know, infrastructure investment cost and, you know, power generation and also the actual sharing of the cost of electricity that is being provided to these data centers. And of course, there is bunch of misinformation about, you know, water use. You know, many of these data centers, right, you know, actually recycle their water. You know, we are sitting here on Lake Michigan. Right? You know, it is not an issue. At all in some of the states. But, you know, I think, you know, data center operators will get over at least provide the right information on water usage. Right? So you take that all in. You know, I am very bullish on continued investment in data center build out for the foreseeable future. Internally, we were joking about that, hey, we said in our prepared remarks, could run out of capacity in the next 18 months, and someone said, maybe we will run out of capacity in 19 months instead of 18 months. Right? So I think, you know, that is our current position. End of the day, given that tightness in the debt markets, and some of the, you know, rationale or return on investments for the data center operators and the hyperscalers. That is gonna drive whether the pace of build out is gonna be rather than we are gonna need to build data centers or not. So, again, I could not be more bullish on data center build out at this election results changes nothing for us. And in fact, right, you know, I am actually cautiously optimistic that post election, whether the states or the federal government will come back to the table with some guidelines, some regulations, and streamline approvals of the data centers streamline, you know, tax abatements or whatever else that they wanna provide in the communities and, you know, put some guardrails around, like, who is gonna pay for investments and, you know, power usage and, you know, cost of electricity to these operators. Right? Having said all of that, if you really step back and then say, you know, outside of building the actual building and the chips, Right? Where is the rest of the investment is gonna be in? it is gonna be in the electrical grid, electrical infrastructure, electrical equipment, switch gear. that is exactly where we are playing. Right? All of the product lines that in DCP that were supporting and, you know, growing with, all relate to electrical infrastructure. Right? So I feel really great about how we have positioned MEC to take advantage of this build out that is coming for the next 3 to 5 years.

Mike: Greg. And the other the other part of my question was about what is going on in maybe Wisconsin. Have any candidates won that, you know, were kinda demanding for higher corporate tax rates, stuff like that, or any other states where you have a lot of--yeah.

Jagadeesh A. Reddy: So. No. I will add another 1. Right? We do not show up until year 3 of the build out. So many of the programs that we are currently supporting were for those projects that broke ground 3+ years ago. So, you know, we are not concerned about, right, you know, what might happen in the next year or so. Things will settle down. Again, I do not want to get into politics, but. And I think the governor elect in Wisconsin is actually very moderate in terms of his view on data centers. But also, right, we are not just supplying into Wisconsin data centers. We are supplying across the country. So I. As I said earlier, right, you know, we expect this noise to, you know, come down a bit and then, you know, more cooler head prevail because we do need these investments. We are not also going to put these data centers in China Right? So we need them. We are gonna get them. And then there will be a lot more streamlined process going forward.

Mike: I apologize. I was actually call. Just asking about broader corporate tax rates on your entire income. Within Wisconsin. And what that might mean.

Jagadeesh A. Reddy: Yeah. If it. If anything.

Rachele Lehr: We do not anticipate really any significant changes, you know, with was blue. it is remaining blue. So as far as that goes, we expect that really to continue to be the same.

Mike: Okay. Perfect. I will pass along. Thank you so much.

Jagadeesh A. Reddy: Thanks, Mike.

Operator: Your next question from the line of Ted Jackson with Northland Securities. Your line is now open. Please go ahead.

Analyst: Good morning, everyone.

Jagadeesh A. Reddy: Morning, Ted. You know, exposure to data centers is continuing to get larger. So how has if at all, can you better manage the variability of data center starts as you go into 2027? And so maybe you can improve the efficiency? And is there a way to aggregate how much of the impact on your 2026 in Q4 EBITDA pressure is from this timing inefficiency versus maybe the other issue you talked about, which is, you know, ag and power sports underutilization? Yeah. I am going to let Rachele Lehr jump in, but, you know, I will just share that. that is a that is a really good question, Andy. You know, that as new entrants into this market, right, we are still learning on how the schedules continue to evolve. For some of our DCP customers. I would say that about $20 million approximately of DCP revenues pushed out of second half of 26 into 2027. So I mean, the reason. I would say the main reason why in addition to just seasonality, the main reason why, you know, we know, came down on our Q4 margins is really because of this high. Highly profitable data center revenues pushed out into first half of next year because our customers are continued. This is more than 1 customer. They are continuing to deal with their own supply chains and, you know, their challenges on, you know, quickly ramping up to these high volumes. So that, let me turn over to Rachele.

Rachele Lehr: I think Jagadeesh just hit on the biggest piece of it. You know, if you take $20 million at 20% adjusted EBITDA, that is a significant piece of that change. You throw in a little incremental labor and launch costs, as we have not gotten to the point of full run rate production on that, that really brings our midpoint down from that 56 to that 50. So those factors really are what contribute there. As we continue to move forward and really hit that DCP ramp, as we just talked about, we will see sequential improvement as we move through 2027.

Analyst: Helpful. And then, Jen, you mentioned now over a $200 million pipeline of opportunity for data centers. Think you previously said data centers could eventually be 25%-30% of your mix could actually be higher than that. And if you think about sort of protecting from postponements, I know you are going to say you are 3 years after these things start. So hopefully, they do not get postponed. But this whole idea of locking in capacity with certain customers, are you closer to that? Do you think you could sort of lock in a lot of your incremental capacity over the next 12 to 18 months?

Jagadeesh A. Reddy: I continue to be optimistic on locking out capacity with our customers, Andy. We have more than 1 customer that we are in active conversations with to allot capacity. Or have some sort of, you know, capacity payment guarantees. So we are cautiously optimistic that will happen at the same time. The pipeline continues to grow. I am more concerned about when do we have to raise our hand and then say we cannot take anymore new business. Because you can imagine, right, these programs, unlike our industrial programs, could take 18 to 24 months to show up as revenue, Now we can, you know, start producing production parts in 3 months And within 6 months of award, right, you know, we are in a full ramp for many of the DCP customers. So that means at least for the first 3 to 6 months, I have to protect that capacity once we win a program, because I know that the ramp is coming in that particular client for that particular customer. Right? So we are working through all of those and then there is obviously cost to hold that capacity, not only for that 6 months before the full ramp hits. But also any further program delays. So as we are learning how to manage that, better, you know, the sales teams are getting smarter, getting more aggressive. So we are going back to a DCP customer, I would say, even in Q4. And, you know, not just talking to them, but actually charging them for delays, charging them for incremental headcount, charging them for, you know, working capital. So we are getting better at this. You know, as we go into 2027, I feel really good about, you know, how we will be able to manage you know, how we manage our cost. Look, you know, we have been in business for 81 years in industrial markets. We have been in DCP for a year. And it is a highly, you know, fast moving industry. So there were definitely some learnings in 2026. That, you know, that will apply going into 2027. I could not be more bullish about 2027. With all the things that the teams have done, what we have put in, the incremental machine, capacity that is coming online in Q1, and, you know, where we are in our hiring cycle. Right, I feel very good about protecting our capacity, being able to charge for our capacity, and potentially locking out capacity with a couple of customers.

Analyst: Appreciate all the color. Thank you.

Operator: Your next question from the line of Ross Sparenblek with William Blair. Your line is now open. Please go ahead.

Sam: Hey. Good morning. This is Sam Carlevon on for Ross Sparenblek. Thanks for taking my questions. I just wanna dig into the qualified pipeline for a second. I mean, it jumped up from $125 million last quarter to $200 million. Can you give us some color on why this jumped so sharply? And what kind of opportunities kind of got added? Were there larger opportunities, new customers? Or is it kind of more opportunities from existing customers?

Jagadeesh A. Reddy: I would say that most of the jump is from new customers. That we have not done business with in the past. So we you know, we. Obviously, we will not talk about specific customers. On these calls, Sam. But, you know, there is 1 customer that is got more than $50 million worth of 3 different programs. We have another European switchgear customer that is got another $50 million approximately of new programs. And we have another US customer over $60 million worth of multiple programs. Right? So I would say that over the last 3 months or so, we were able to continue to work with these customers better qualify, and, you know, many of these programs that these customers I just mentioned are, you know, very close to decision. Right? So now we can say that not only the customer's close to a decision, our chance of winning those programs is greater than 50%. And that is when, you know, we feel really good about putting that and actually raising the bar on our, you know, qualified pipeline.

Sam: Got it. And just a follow-up on that. Can you talk about what kind of the primary decisions or the factors that are leading to how these customers make decisions? on where they kind of put this volume.

Jagadeesh A. Reddy: Yeah. So 2 things. 1, location, location, location. So that is getting to be even more important and hence plays well with our Thompson investment. Second 1 is the ability to bring on a $50 million program in a 3 to 6 month period There are not a whole lot of fabricators in North America. That could do that and do that effectively. So that plays to our strength because not only do we have the footprint, we have been investing. Yes. There we are paying the cost for it upfront. You have seen how we have outsourced, how we have higher temp labor to bring in those capabilities quickly. You know, we could have waited until 2027. To invest in these resources and capacity, and we would have missed the boat on some of these opportunities. Right? So Even though in the short term, right, it feels like there is a drag on the p and l, which it is, I feel really good about, right, you know, what this is gonna do to us. Not only in 2027, but also 2028 as we win these significantly larger programs. You know, when we started after the acquisition of AccuFab, we were winning $2, $3, $5 million programs. Now we are $20 million, $30 million, $40 million, $50 million programs, right? that is the difference and there is. There are not a whole lot of folks on that bad 40 list that can step up and say, not just, you know, 1 or 2 programs, but, you know, we are competing for easily 7 to 10 different programs that range from 20 to $50 million in size. Right? So that is the testament to MEC's experience, capabilities, footprint, and, you know, our investments that we made. You know, I wanna thank all of our investors for standing by us in our equity raise. We are putting that equity raise funds to good use in investments for the future.

Sam: Got it. No. That. that is good to hear. And just a quick 1 on CV. I mean, I noticed you guys put out your kind of preliminary 2027 expectations. Commercial vehicle expecting up mid to high single digits. I mean, comparing that with the ACT growth, expectations for 9% next year, Can you maybe help us think about how your kind of content per truck moves up with the 2027 model year and kind of how that should flow through to revenue?

Jagadeesh A. Reddy: Yeah. You can also see. Hey. Third bullet. Right? We anticipate some strategic exist exits in the CV market. As we talked about in the past. In the industrial markets in general, I will be, you know, specific to CV and ag and also construction and access. We are aggressively pursuing higher pricing from many of our customers. We expect you know, net 20 to $30 million worth of exits next year. From our industrial customers that just gives us the opportunity to redirect that capacity towards data centers. So, you know, even though ACP is projecting 9% growth next year, let's say, close to 300 thousand approximately 300 thousand Class A builds next year. We agree with that. At the same time, right, we might see some exits that, you know, will help us in the long run to reposition our capacity towards higher margin data center work.

Sam: Got it. That makes sense. I will pass it along.

Jagadeesh A. Reddy: Thank you, Sam.

Operator: Your next question from the line of Greg Palm with Craig-Hallum. Your line is now open. Please go ahead.

Jagadeesh A. Reddy: Morning, Greg. Good morning. Yeah. Good morning.

Greg: Thanks for taking the questions. Maybe to start with, I was hoping you could unpack a little bit more about some of the, you know, call it, the inefficiencies, the ramp cost, some of the schedule changes, all that stuff that is, you know, kind of impacting and timing. And you know, as we think about labor or lack thereof, some of the, you know, availability challenges does that impact where you think you wanna put a lot of this data center work relative to what you were thinking 6 or 9 months ago?

Jagadeesh A. Reddy: Yeah. I am gonna start and then, you know, Rachele Lehr will jump in. that is an excellent observation, Greg. Where we thought we would have some of these programs 6, 9 months ago is different than where we are putting those programs in today. Many of our rural plants continue to struggle to ramp up. Across the company today, we have somewhere between 230 and 250 job openings in our plants. That number continues to go up because we continue to win new business. that is not a challenge obviously as well. But even if we are static, we still have, you know, 200+ job openings in the network. So what that did was, you know, to support in the short term, we went the route of outsourcing. Then we started hiring temp labor in many of these locations. As everyone knows, welders are the hardest trade to hire right now. So we have couple of plants where we are today paying $90 an hour plus per diem. Whereas the starting wage in our factory today at the same factory is around, you know, a little you know, below $30. Right? So our customers across the street at the same time are also paying $90 an hour. So it is a it is a known problem. Right? So what are we doing about it? Number 1, we restarted in multiple plants, you know, boot camps to train our own welders. So that, you know, we can promote within, train folks that are maybe doing a different job that can make. You know, maybe they were making $18 an hour. Now they can make $30 an hour. Right? So we are doing some of that work. But more importantly, in that particular plant, right, we decided to pull out some of the work that had weld content, and we cannot hire welders at that location. And we started putting in. Actually, data center work that does not have--well, right, many of our data center projects do not have a lot of welding. So we are rebalancing the network where you know, where is the labor available, Let's go put labor. Sorry. You know, programs that can be tailored to the labor availability and then move programs around. Right? We did a lot of that work in the second half. Sorry, in Q3 in particular and then work will continue through Q4. Again, that is what is gonna help us going into 2027. At the same time, we know that we can hire a lot of people in Hazel Park in Chicago, in North Carolina, and now in Georgia. Right? We are gonna focus heavily towards those 4 locations where we can hire, you know, you know, many folks in all kinds of trades at these locations. So we are shifting our focus towards you know, those locations and, you know, reordering, you know, where do we put, you know, weld content, where do we put assembly type content, where do we put, you know, different type of program? Right? So all of that work is underway. The team has done a phenomenal job in Q3 and, you know, we feel really good about, you know, entering 2027 in mitigating some of these constraints. Right? So the machine constraints are gonna come down by Q1 with new machines now being installed in many of our plants that we paid for almost 2 quarters ago. And now there are some of the labor constraints will continue to come down as we go into first half of next year. Exiting Q2. And last but not least, the outsourcing will, you know, come back in as the machines come online. Right? So that is where we--so we are managing some of these challenges. But as you said, right, you know, yes, you know, that changed, you know, what our outlook was 6, 9 months ago. Where these programs are gonna go, to where we are slotting in these new programs and new wins across the network.

Greg: Yep. Okay. That makes sense. And then kind of related to that, your, you know, ability to, you know, reprice you know, both kind of existing contracts and certainly some of the newer stuff in light of, you know, whether it is just higher inflationary costs, you know, higher labor costs, etcetera. Like, what are you what are you seeing?

Jagadeesh A. Reddy: Yeah. We are taking a strong position on repricing. As I answered Sam's question earlier, we do expect you know, some strategic exits. Mutual. Mutually agreeable exits, if you will, And we are gonna leverage price to do that because we do need some incremental capacity in some of these plants, and we are using price to exit some of our legacy programs and perhaps put in some new programs.

Greg: Okay. Fair enough. Appreciate the color. Thank you.

Operator: The line is now open for additional questions. To withdraw your question, press *1 again. Please standby while we compile the Q&A roster. Your next question from the line of Ted Jackson with Northland Securities. Your line is now open. Please go ahead.

Jagadeesh A. Reddy: Morning, Ted.

Rachele Lehr: Morning, Ted.

Ted: Hi. Good morning, guys. I was a little concerned that they did not recognize that my hand was up. You know? Just waving it. Most of my questions are answered. I have a couple. I wanted to talk a little bit about ag and powersports. And, you know, I mean, powersports is a little bit of its own piece. My sense with regards to ag though, I mean, you look at it, you know, Deere has been hiring people and talking about kind of bringing production up and, you know, components of ag. Know, if you listen to AGCO's call, you know, North America was somewhat of a bright spot. Most of these guys have been producing below retail demand in North America expect to, you know, not necessarily see retail grow least not that much, but they do expect to see volume improvements simply because they will be able to produce to demand instead of beneath it. Yeah. You are showing Ag go down. And then over on powersports, know, if you kinda dance through powersports, you know, it seems like some of the motorcycle side of things in The US is kind of stabilized, performing well. You know, the side by side market, maybe it is not doing fabulously well, but if you kinda parse it through, and maybe I am wrong on this, but take out the recreational side and look at more of the utility side, if assume that all kinda runs through that same line item for you, that is definitely a bright spot. And so I guess where I am going with this is, you know, are you. Is the declines that you are putting forward with regards to your outlook for those markets am I missing something, or is it more because you are walking away from business that and you see everything with this? It does not square. The circle does not square very well. it is not--yeah.

Jagadeesh A. Reddy: Yeah. Just what we call it. Good question. Yeah. Good question, Ted. Let me address 1 at a time. Let me address ag first. We have to see from a macro perspective, we have to see tariff relief, and we have to see diesel prices come down for the economics to work for a farmer to afford a brand new large HP tractor or a new combine? Right? So that is the challenge that I do not see that happening. I do not know. Maybe last night's results might change some of that next year. Maybe we are cautiously pessimistic about it. And we will see how it plays out next year. But some of the hiring you talked about at 1 of our customers, in fact, our mix of business that with that customer, you know, predominantly tilts towards construction, rather than ag. So ag continues to be a smaller and smaller portion of our overall sales. So we are not putting a lot of weight on a recovery in the short run. But whenever it returns, right, we will be prepared for it. In terms of power sports, you are absolutely right. We are sitting here in Milwaukee, this morning's news talked about, you know, significant sales in our local customer. At the same time, that same customer insourced 8 jobs to the U.S. and you know, that is a pat on their back You know, what that really means is that they are outsourcing more and more of the work similar to every other powersports customer to Asia. We are seeing significant movement in the supply chains where they are relocating to Asia. So given that, even though the market may be stabilizing in terms of retail sales, I think from a supplier perspective, right, we continue to see declines in our business with these power sports customers. And hence, our focus, you know, we had 2 powersports specific factories We already converted 1 to a data center focus factory. And then, you know, we continue to look for opportunities to put in more data center work into the, you know, other powersports centered factory as the time progresses here. So I am not very bullish on power sports returning, at least for us, and we will see what happens with that.

Ted: Okay. Well, that is a great answer. Shifting over on kind of some of the outsourcing stuff. You know, you commented in the release that you had a headwind of about $3 million in the third quarter and if my memory is right, that was kinda what you had expected for all of the second half of 26. So it seems like that was a little bit more maybe in the quarter than was expected. And so I guess where I am going with that is am I correct on that and then that headwind that you are having with some of the costs as it relates to, you know, outsourcing of products. What do we expect for fourth quarter? And, I mean, I know you are not giving 2027 guidance, but maybe kinda how we should think about that headwind in the first quarter as well. My next question.

Rachele Lehr: Yeah. The so as we shared coming into this, we expected a million to $2 million. You know, that is really launch and outsourcing. So you almost have to look at it, the 2 added together for what we reported. We had previously shared that those would be each about half of that amount. And so that is where the disconnect is. So we have not changed our total amount on outsourcing. We had projected, you know, second half for that would be 2 to 3 million. So you are you are absolutely right. it is about half of that. In each of the quarters. it is the aggregate of the 2 that is the $3 million.

Ted: Okay. So that is my confusion is I am. it is an apples, and oranges thing in terms of what I was looking at. Yeah. And then my next question is just on. You know, you have you have ordered a bunch of equipment. it is all being delivered. You are having. You are installing it. So I guess the first question on this is, you know, walk us through the timing of that. Do you expect to have this equipment installed by the end of this fiscal year or in installed by sometime in the first quarter. And then how long will it take you to, you know, kind of get it installed, commissioned, and start being able to, you know, to produce off of it. Because that brings down 2 things for you. And 1 of them is just this outsourcing revenue. And then 2 is, you know, better, you know, asset utilization rates. So a discussion with regard to kind of the time line for that equipment, and then, maybe a discussion with regards to how you are thinking about CapEx for 2027.

Rachele Lehr: The equipment is. Some of it has arrived or is arriving late in Q4, to really have it up and running. that is going to be sometime in Q1. So to your point, once we get that up, that will solve a few of our problems. It will take time, though, to transition the outsourcing work back in once it is up and commissioned, but really see Q1 as being key in having the equipment up and being able to move through those costs. And then as we look to 2027, you know, some of these. This equipment will obviously have to make a final as it arrives final payments and final pieces. But as we have shared on our, you know, presentation and our guide, we are looking at $40 million to $50 million next year, still focused on the growth. that is continued to be the big area that we are focusing on as we continue to grow in the data center and critical power space.

Ted: Okay. Okay. So when we think about the equipment that you have, you are going to have it all in place from in the fourth quarter. You will only get it commissioned in the first quarter, but we will not really see the impact from that, progress in margins probably until the second quarter of 27. And then from there second quarter. Part of the scale go And then. So that means that the first quarter, what you are really expecting to drive your margin higher is this $20 million of revenue that slipped out of the fourth quarter. Yes.

Rachele Lehr: that is our, you know, improving the run rate. On the DCP and getting that as a higher piece of our mix will certainly help our overall margins.

Ted: Okay. All right. Thanks for taking my questions.

Rachele Lehr: Thank you, Ted.

Jagadeesh A. Reddy: Thanks, Ted.

Operator: This concludes our Q and A.

Jagadeesh A. Reddy: I will now turn the call back to Jagadeesh A. Reddy for closing remarks. Before we close, I wanna thank our employees for their dedication and hard work this quarter. And our shareholders for their continued trust in MEC. We are confident in the path we are on and in our ability to build a stronger faster growing, and more profitable company in the years ahead. We look forward to updating you on our progress. Thank you for joining us today.

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