Mayville Engineering Company, Inc. (NYSE:MEC) Q4 2020 Earnings Conference Call March 3, 2021 10:00 AM ET
Nathan Elwell - Lincoln Churchill Advisors
Robert Kamphuis - Chairman, President and Chief Executive Officer
Todd Butz - Chief Financial Officer
Ryan Raber - Executive Vice President of Strategy, Sales and Marketing
Conference Call Participants
Mig Dobre - Robert W. Baird & Co. Inc.
Andy Kaplowitz - Citi Group
Chip Rewey - Rewey Asset Management
Good morning and welcome to the Mayville Engineering Company Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Mr. Nathan Elwell of Investor Relations. Please go ahead.
Thank you. Welcome, everyone, and thank you for joining us on today's call. A few quick items before we begin. First, please note that some of the information you will hear during this call will consist of forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Such statements express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks, assumptions and uncertainties, our actual results could differ materially from those in the forward-looking statements.
For more information regarding such risks and uncertainties, please see our filings with the Securities and Exchange Commission, including our filing on Form 10-K for the period ended December 31, 2019, and our filing on Form 10-Q for the period ended September 30, 2020. We assume no obligation and do not intend to update any such forward-looking statements, except as required by Federal Securities Laws. Second, this call will involve a discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in the earnings press release, which is available at mecinc.com.
Joining me on the call today is Bob Kamphuis, Chairman, President and Chief Executive Officer; Todd Butz, Chief Financial Officer; and Ryan Raber, EVP of Strategy, Sales and Marketing. First, Bob will provide an overview of our performance, then Todd will review our financial results and guidance. Bob, please go ahead.
Thank you, Nathan. Good morning, everyone. As we look back at 2020, we're pleased with the way we’ve responded to the pandemic challenges we faced. Not only did we effectively adapt our operations to continue working throughout the year to support our customers, we were still able to focus on optimizing our cost structure through facility and process improvement and strengthen our financial position. I give credit to our leadership groups throughout the company for being creative and quickly formulating improvement plans and our entire team for their resilience and diligently implementing those plans and continually adapting to the changing environment. Agility, adaptability and realignment are strengths of our business culture of MEC.
The fourth quarter provided a positive end to a challenging year. In short, we did exactly what we told you we would do last quarter. All things considered we're pleased with our performance for the quarter and our progress for the year. We continue to maximize the efficiency of our manufacturing operations. And we are seeing the positive impact of these initiatives in our results.
For the fourth quarter of 2020, we delivered net sales of $95.3 million, slightly lower than fourth quarter of 2019, but a sequential increase from the third quarter of 2020. Most importantly, we've produced adjusted EBITDA and adjusted EBITDA margin of $9.3 million and 9.8% for the fourth quarter respectively, both of which are significantly higher than the same period last year, as we are now more efficient and have reacted to the changes that occurred late in 2019.
During 2020, we realized significant improvements in our operational efficiency in three main ways. First, by capturing full year benefits from the acquisition of DMP, which is now fully integrated into our organization and producing the expected synergies. Second, by realizing efficiencies from our ongoing investments in technology and automation. Third, from the consolidation of Greenwood South Carolina's facility during the second and third quarter of last year. Executing this project successfully reduced our footprint and overhead costs while maintaining our operating and manufacturing capacity. And it was all completed on-time and on-budget without missing a beat with our customers. Overall we saw a strong recovery following the second quarter and end of the year on a positive note.
I'd like to provide commentary regarding what we are seeing across the diverse end markets we serve. Last year, we provided our outlook by market to give a sense for our anticipated breakdown of business for the year, given the 2020 was such an unusual year, and this information is meant to be directional comparing ‘21 to ‘20 will have little value. Therefore, we're providing our thoughts on a 2021 basis only. First, we anticipate that commercial vehicle market will comprise approximately 35% to 39% of net sales.
The construction and access market is expected to represent approximately 17% to 21% of sales. Powersports is expected to account for 18% to 22% of our net sales. We expect the agriculture market to contribute 7% to 11% of net sales. The military market will comprise approximately 5% to 9% of net sales. And finally, we expect the remaining 6% to 10% of ‘21 sales to be attributed to other markets we serve.
In our commercial vehicles market, the near-term looks a lot brighter than it did a year ago as we exit the 2020 [indiscernible]. Our orders during the quarter were in line with our expectations, and we anticipate that the market will remain solid in the near-term given the continued strength of carrier profitability, driving industry, new truck orders and growing backlog. We continue to monitor build rates that our customers’ closely paying attention to potential supply chain constraints that could impact our volume at some points in 2021. At the moment, the powersports market appears to be maintaining its positive momentum, as outdoor recreation is expected to be a priority for consumers again in 2021. We continue to believe that this is an area of relative strength in the near-term as customers work to rebuild their dealer inventories and satisfy customer retail demand.
In the construction and access end markets, we see positive signs in residential construction, while uncertainty exists in non-residential and oil and gas markets. We believe that customer de-stocking was completed in 2020. And we are positioned to respond well to any changes in retail demand going forward.
The ag market looks positive today, and the market dynamics of increasing crop prices and lower crop inventories that we have seen recently bodes well for this market in the future. Finally, our military segment has continued to be a steady market for us and we expected to be an ongoing source of strength for the foreseeable future.
As a reminder, we have maintained or expanded all of our contracts or customer relationships, and expect our volumes will return in conjunction with our customers. Of course, we're constantly building relationships and looking for new opportunities to expand both our customer base and the markets we serve. Today, we see opportunities for new projects and takeover business. For example, in the fourth quarter, we continue to cross-sell products and expand market share across multiple product lines for one of our important commercial vehicle customers. As they launched their new models of trucks this year, you will see our product development efforts continue to provide organic growth in this business.
In the construction market, we were able to expand our relationship with one of our key customers that continues to successfully expand their product line through our consistent performance and broad capabilities. We continue to grow with them as they expand their market share through their product line expansions.
The powersports market continues to be very active with new rewards for future model year updates from one client. And we've continued to build relationships with new customers in this market that will lead to new opportunities in 2021 and beyond. In the military market, our customers look to sell their vehicles in international markets. We're seeing new products to grow our market share while also gaining additional volume above historical levels.
Overall, the pipeline of new opportunities remains robust, with numerous new products, projects and markets being actively pursued, which continues to build our excitement within our organization about the potential opportunities for 2021 and beyond.
As far as capital allocation priorities are concerned, in addition to investing in the business, deepening current relationships and pursuing new ones, we remain open to strategic acquisition opportunities, which will help us achieve long-term growth. We are seeing some M&A opportunities, although the market still remains relatively quiet. Given the strength of our balance sheet, we are in a strong position to pursue the right deal at the right time that will expand and diversify our product offering open new industries and introduce new blue chip customers and markets.
As we look back at 2020, it clearly didn't turn out to be the year anyone expected. At the start of the year, we were presented with challenges no one has faced before me included. And I'm proud to say I'm very pleased with how our team responded. We controlled costs effectively as volume strapped we switch gears and implemented the green with consolidation. We pursued new business and ensured we were doing everything possible to deliver for our customers and our shareholders.
Although the outlook for the economy is better today than it was six months ago, we will still face external headwinds. In particular, the market is experiencing raw material and component shortages for many OEMs, which runs the gamut from steel to computer chips. This could translate into delays for our customers, which in turn could impact our volumes. We're closely monitoring the trends, and we'll provide updates as soon as we can.
However, with conditions generally stabilizing in recent quarters and showing some signs of improvement, we are positive about our future prospects, and are focused on three things execution, execution, execution. It will take a bit of time to return to pre-pandemic volume levels. While we are well positioned for the future and poised to expand our market leading position.
I would also like to mention that back in December, we made some changes to our Board of Directors. First, current director Craig Johnson indicated he will not seek reelection and would retired from the Board at the end of his current term expiring at the upcoming 2021 Annual Meeting of Shareholders. We have all been very fortunate to have Craig serve on our Board for the past 14 years. Our company has grown tremendously during his tenure, and his expertise has been an invaluable resource for MEC through times of growth and change. On a personal note, I want to extend my gratitude to Craig for his counsel and support over the years. We all wish him the very best for his retirement in 2021.
Second, our Board elected Jennifer Kent as a Director of the company. With over 20 years of broad business and leadership experience, including managing multiple functions at a public company. Jenny is an excellent addition to our Board as a new independent Director. In addition to our extensive legal compliance and human resources experience, we look forward to gaining her perspectives on diverse areas such as change management, talent development and legal and compliance risk management. Jenny currently serves as Executive Vice President of Administration, General Counsel and Secretary at Quad Graphics, a worldwide marketing partner with a strong reputation in print, where she oversees a broad range of corporate functions including legal compliance, human resources, corporate communications, government affairs, real estate and safety and environmental management.
Finally, before handing the call to Todd, I just want to mention that we remain vigilant when it comes to COVID-19 pandemic. I'm pleased to report that we have not seen any major impact on our operations in recent months and quite frankly, throughout the time that this has been in existence. And I want to commend our employees for taking the right precautions at work and making the right decisions if they feel unwell to ensure they didn't pass the virus on to co-workers. As this pandemic stretches on, we will not get complacent with our procedures and expect to keep operating effectively and efficiently in the months ahead.
Now I'll hand it over to Todd to discuss our financials. Todd.
Thanks, Bob. I'll begin with the highlights of our full year financial performance and then discuss our fourth quarter for providing commentary on our balance sheet liquidity and our thoughts on guidance.
As noted in our press release, we’ve recorded full year 2020 net sales of $357.6 million, as compared to $519.7 million for the same prior year period a decrease of 31.2%. The decline was driven by volume reductions related to de-stocking activities and market demand changes mostly driven by the pandemic.
Despite the lower volumes, our customer relationships and manufacturing programs remain intact. Adjusted EBITDA and adjusted EBITDA margin percent for the full year 2020 finished at $32.8 million and 9.2% as compared to $54.7 million and 10.5% for 2019 resulting in a decremental margin of 13.5% as compared to our historical average of 17.5%. The improved decremental margin percentage is attributed to our effective implementation of cost reduction activities, including the Greenwood South Carolina closure, a full year of DMP synergies, and leveraging our recent investments in new technologies and automation. It is important to note that these cost adjustments are permanent, providing a clear path and a 15% adjusted EBITDA margin expectation when manufacturing volumes returned to pre-pandemic levels in the coming years.
Despite the challenges posed by the pandemic, we generated a strong cash flow resulted in significant debt pay down of approximately $28 million, resulting in an ending debt balance of $47.9 million and the leverage ratio of approximately 1.5 times as of year-end.
Now I'll provide guidance on the financial performance for the fourth quarter. We recorded fourth quarter net sales of $95.3 million as compared to $102.3 million for the same prior year period a decrease of 6.8%. The decline is due to market related manufacturing volume reductions, again mostly driven by the pandemic. Manufacturing margins are $11 million for the fourth quarter of 2020 as compared to $4 million for the same prior year period an increase of 174%. Prior year manufacturing margins were adversely impacted by sudden declines in market demand, customer related labor union issues and de-stocking activities, resulting in unusually high amount of under absorbed manufacturing expenses during the period.
Current year manufacturing margins exemplified the impact of leveraging our recent investments in new technology and automation, implementing permanent cost reduction initiatives, including the closure and deconsolidation of the Greenwood South Carolina plant and synergies for the DMP acquisition.
Manufacturing margin percentages were 11.6% for the fourth quarter of 2020 as compared to 3.9% for the three months ended December 31, 2019. An increase of 770 basis points resulted in an incremental margin percent well in excess of 100% as compared to our historical average of 22.5%. This positive comparison was driven by the effective implementation of the aforementioned permanent cost reduction initiatives and labor efficiency gains driven by our investments in automation. Based on these improvements, manufacturing margin percentages are expected to improve beyond historical averages when volumes return to pre-pandemic levels in the coming years.
Profit sharing bonuses and deferred compensation expenses were $3.4 million for the fourth quarter of 2020 as compared to $2.2 million of income for the same prior period, an increase of $3.6 million. The increase in the current period expenses mainly due to the reestablishment of discretionary employer 401(k) contributions, as well as some discretionary bonus that had been eliminated in the second quarter of 2020 due to pandemic uncertainty.
Other selling, general and administrative expenses were $4.4 million for the fourth quarter of 2020 as compared to $5.2 million for the same prior period, which included $0.5 million of one-time IPO and DMP acquisition related expenses. Excluding the one-time charges from last year, these expenses decrease $0.3 million due to the synergies achieved through the integration of DMP, lower travel expenses due to the pandemic and other cost savings initiatives.
Interest expense was $0.6 million for the fourth quarter of 2020 as compared $0.9 million for the same prior year period. The $0.3 million decline is due to our lower debt levels and lower interest rates this quarter as compared to 2019.
Income tax benefit was $1 million and $2.1 million for three -- for the 3 and 12 months ended December 31, 2020, respectively. With an annual effective tax rate of approximately 23%. Our federal net operating loss carry-forward was approximately $12 million dollars as of the year-end, which was driven by pre-tax losses caused by the aforementioned volume reductions in 2020 and the one-time IPO and DMP acquisition related expenses in 2019.
The NOL does not expire and will be used to offset future pre-tax earnings. We continue to anticipate our long-term effective tax rate to be approximately 26% based on current tax regulations.
Adjusted EBITDA and adjusted EBITDA margin were $9.3 million and 9.8% for the fourth quarter of 2020 as compared to $5.5 million and 5.4% for the same prior year period. These increases are directly attributable to our permanent cost reduction initiatives, leveraging recent investments and new technology and automation and short-term adjustments to realign the business to the aforementioned buying declines. Again, these costs adjustments are permanent, providing a clear path to our 15% adjusted EBITDA margin goal when volumes returned to pre-pandemic levels in the coming years.
Now, let me address our balance sheet and liquidity figures. As previously mentioned, despite a very challenging first half of the year during the pandemic, we are very pleased with our results and ability to generate cash flow, which directly results in a debt reduction of approximately $28 million in 2020. With total funded debt of $47.9 million at year-end, which equates to a leverage ratio of approximately 1.5 times.
Capital expenditures were $7.8 million for the 12 months ended December 31, 2020, as compared to $25.8 million for the same prior year period, a decrease of $18 million. The decline was earned by 2019 investment cycle that focus heavily on investments in new technology and automation versus more of a focus on leveraging those assets, investments in 2020. In the normal course of business, we continue to expect our annual CapEx to average approximately $20 million per year, which is a combination of maintenance capital, along with continuing investment in new technology and automation.
As previously discussed, we amended our credit agreement at the end of the second quarter of 2020 in order to provide an added level of insurance against future macroeconomic events, allowing us to remain focused on serving our customers and managing our business. The amendment increased the maximum leverage ratio from 3.25 times to 4.25 times through the fourth quarter of 2020. And we'll adjust each quarter thereafter, until returning to the original 3.25 times in the fourth quarter of 2021.
Now I'd like to briefly discuss our outlook for 2021. As noted in our press release, and based on the continuation of the COVID pandemic, which is driving near-term labor and material availability concerns and consistent with most of our top customers. We are not providing a specific quantitative financial outlook at this time. However, we believe that we should be able to build and improve upon our second half 2020 performance during 2021 with fairly consistent performance throughout the year. At this time, we believe our 2021 results will exceed our 2020 performance but not returned to pre pandemic levels. Generally we see our numbers in line with current consensus estimate.
With that said, I will turn the call back over to Bob for closing remarks.
Thank you, Todd. We're pleased with our recent results on the progress we're able to make during the difficult year, while not back to pre-pandemic levels. As Todd mentioned, we are seeing volumes improve across many customers and end markets. And most of the commentary from our customers about the future is positive.
In the fourth quarter, we did exactly what we said we would do and I'm pleased we're able to end the year on a high note. Assuming the economy continues to stabilize and improve. We are bullish about our prospects in 2021 and beyond as we pursue further productivity gains through new technologies and automation and explore important internal and external growth opportunities.
On behalf of the Board and our Management team, I want to thank each and every MEC employee and shareholder for the dedication they have shown during very trying circumstances over the past year. We continue to be vigilant regarding the pandemic, and believe our employees are now used to operating with these restrictions in place. Despite the disruption, their persistence and consistent strong performance has ensured we have maintained all of our customer relationships and manufacturing programs and now are in a position to respond as customers ask us to ramp up volumes. With our current business as well as opportunities on the horizon, we are well positioned to drive growth in the years ahead.
With that said operator we'd like to open up the call for questions.
We will now begin the question and answer session. [Operator Instructions] We'll pause momentarily to assemble the roster.
First question comes from Mig Dobre, Baird. Please go ahead.
Thank you. Good morning, everyone.
Good morning Mig.
I -- thank you for the ranges that you've given us by end market in terms of your mix for ‘21. Just a quick question on 2020, can you give us a sense for commercial vehicles how much that contributed to your to your revenue in 2020?
Yes, that was in 33% range, I think, right around 33.
Okay, thank you for that. And your reference consensus sort of being generally in line with kind of how you're thinking about 2021 at this point. 2021, is likely to be a year of good volume growth. So I guess my question is, as you're sort of looking at your operations currently, what is -- what do you see as your ability to be able to meet that that higher demand? Do you see any challenges ramping up production, either related to your own operations or your own supply chain in this regard?
Yes, I'll take the comment about supply chain first. And I guess, there has been some steel shortages in the marketplace that we are aware of, obviously, steel pricing has increased significantly. But most of our contracts are passed through on the material costs. On the availability side, we've actually done very well on probably better than most. So we've worked very hard at that all the time Mig. And as far as there are some very modest imports that come into our product before we ship it. And we're working on those things as well. It's almost immaterial to talk about.
On the internal side with the equipment and investments that we've made, that helps mute some of the people requirements that otherwise would have to be taking place. We still have pockets, it's different locations, different geographies, geographies have different challenges. But again, I think our investment in automation is showing that that we did the right thing and will continue to do the right thing with those investments. So I -- we won't be without challenges, but I think we're continuing to work at minimizing them.
Okay, it sounds to me, and I don't want to put words in your mouth here. But it sounds to me that you're fairly confident that you're going to be able to essentially keep up with your customer demand in 2021. And I suspect that not all your competitors are going to be able to do that. And even your own customers, the ones that are having internal fabrication operations and whatnot are probably going to struggle to some extent, ramping up. As you look back at the prior industrial downturn or recession. Is there an argument to be made that you will be able to gain some share or incremental business just given your ability to ramp your own production higher and hopefully take some share that way? What if [retire] you in this regard?
Right, I think history is one thing, but we were less automated at those times. Hopefully with our additional automation, we have more leverage potential there. But we're going to be very careful about it. We want to look at that opportunistically. And it's not just about share. It's about profitable share. So that's what we're focused on and doing the right things overall for the business.
I see. And that actually, this is my second line of questioning which is surrounding margin. You talked about the fact that raw material costs are generally a pass through, but I know that some of this is embedded in your own business, right? I mean, if I'm thinking about consumables on a welding side, that's something that you have to deal with that I presume, and it's not something easily passed through to the customer. So how do you think about the impact of that on your financial model in 2021? Should we expect you to adjust pricing accordingly? And do you think you can be at least neutral from a price cost perspective?
We're working hard at doing that. I guess, when we looked at things like automation, actually, some of the equipment is more energy efficient for the consumables that go through a weld wire, weld gas things like that, you're using equal amounts as you would in a less automated situation. So we -- and we also have continuous improvement activities by site that we manage kind of on a corporate wide basis, so that we're sharing best practices and best ideas between locations. So that's a prime focus and we work hard at it. Our hope is to be able if we have some crazy increases in those things that go into overhead or perishables. We'll probably see a little bit of diminishment. But on the flip side as we look at our backlog of work, if things perhaps need to be adjusted upwards, we'll have some of those discussions with our customers.
I see. And then last question for me. You talked about the 15% margin goal and reiterated that you're confident on reaching that. I'm sort of curious as to how you're thinking about the manufacturing margin, and what's embedded within that outlook. If my memory serves me right, your prior peak manufacturing margin was right around -- right under 15, I should say. So within that framework, should we expect that figure to be higher than it's been in the past? And as you think about 2021, based on the discussion that we just had, how should we think about manufacturing margin in ‘21? Thank you.
Mig, this is Todd. Yes, definitely, as I stated in the script it was, we do expect when we get back to let's call it normalize or pre-pandemic levels at that manufacturing margin percentage will be above historical averages. So when you think of the peak -- as peaking around 50%, getting back to pre-pandemic levels, we would expect that to be north of that percentage and probably in that, I would say 16 to 18 percentage point range. But certainly we think at ‘21, I expect it to be improved from 2020. But again, what we think that the under applied overhead because of lesser volumes compared to 2019, it's not going to get back to that, I would say 15% this year. But again, once we started getting into leverage our investments and our overhead with pre-pandemic level volume, we do expect that to be north of the 15%. And then we achieve that 15% adjusted EBITDA margin.
Thank you. Appreciate it.
Thank you. Next question from Andy Kaplowitz with Citi Group. Please go ahead.
Hey, good morning, guys.
Good morning Andy.
Maybe I could ask Mig’s question one other way on the margins. You guys have said in the past that given the cost out and footprint consolidation that you've done that you might be able to average high 20% incremental sales recover is that possible in ‘21? I know you said you're comfortable with consensus. But obviously, there's price versus cost. And all that kind of stuff you just talked about. So is that possible in ‘21?
Yes, 22.5 % as our historical average, we do believe that still achievable in 2021. Now, you won't see the 30% and 40%, you don't even 100% type incremental that you saw when you compare it to 2020 to some of the 2019 fourth quarter, but we will still be above the 22.5% in my mind the cost reductions we've made.
Got it. That's helpful Todd. And then Bob, maybe just for a little more clarity and maybe Todd answer this also. So if we look back at Q4, I mean, you talked about not yet reaching pre-pandemic levels in ‘21. But if we look back at 2020 in Q4, I would assume some of the businesses some end markets already above pre-pandemic levels, given you're only down 6%, or whatever it was, and powersports has been relatively obvious maybe military but any sort of more commentary on the end markets themselves and sort of what's already sort of recovered if you may versus what's not recovered.
Sure. Well, when we say pre-pandemic, there's a couple of definitions. 2019 was one year and pre-pandemics is kind of first quarter of last year. Obviously, the commercial vehicle market was in a downturn going into 2020 and has since bottomed and it's coming back. So that one, we've seen that begin on the third quarter and strengthen in the fourth and we think we'll continue to improve throughout ‘21.
So that's what we're talking about is that's one example of what we're talking about when we say pre-pandemic. Other markets, likewise, we've seen the inventory de-stocking become complete, during the second quarter, third quarter period of time. And those markets have bounced back. So when it comes to the recreational products, obviously, they were not essential manufacturers, so they ate their inventory during the second and third quarter and now are replacing inventory and trying to keep up with demand. So everything has been moving pretty much in a very positive direction. So that gets the color I can put around that.
And Bob, maybe just following the [ag], like in terms of restocking powersports, sure, and you said maybe that sort of levels off at some point in ‘21. Is that still your thinking? And then for end markets like small ag, for example, and there was de-stocking that seem to end? Do you think that any markets will really need restocking in ‘21 decides powersports?
I guess I'm going to ask Ryan, if he has a more close impression on that one. But I guess I'll start by saying we'd agree that they'll come a point where inventory is restocked on the recreational side. And then the other markets yes Ryan you have some comments?
Yes, I guess you mentioned small ag and definitely there was a quick depletion of inventory kind of in the middle of 2020. That has led to a little bit of restocking there. We would also see it a little bit in the construction market as Bob noted in his remarks, the housing market has been strong. We've seen a lot of the rental companies increase CapEx year-over-year, in certain pockets of equipment tied particular to more of the housing sector. There is a little bit of restocking activity that has taken place there in the construction market.
Thanks Ryan. And then maybe one more for me, can you give us an update and where you are in terms of acquiring new customers and entering new verticals? I know you talked about it a little bit, Bob in the prepared remarks. But you've been talking about opportunities in the past like warehousing, packaging, how are you thinking about new potential business contribution to ‘21? I know it's sort of in the other segment, but anything that really excites you in ‘21 and beyond?
Well, I guess we'll be able to talk about it more when they occur and if they occur, but we're pretty positive about the opportunity and the potential out there, Andy. And so I think that's my comment on that. If -- when we can report it, we will report it.
And Bob are you seeing any evidence of existing customers re-shoring at all, or maybe pushing outsourcing more?
Sure. And that's part of that story and creates those kinds of opportunities. So absolutely, that's part of part of the piece behind that.
Great, thanks, guys.
[Operator Instructions] Your next question comes from Stephen Volkmann of Jefferies. Please go ahead.
Good morning Steve.
Hi, this is [Bob Kamphuis] for Steve. I just had a quick question on any temporary cause coming back in ‘21 and just probably cadence on it. I know you mentioned that travel expense and related expenses were down this year. Any guidance on what we can expect in 2021?
Yes, I guess on those topics, there will be -- we do expect some employee benefits, retirement benefits to return to a more normalized level last year, as Todd mentioned about the fourth quarter, we kind -- we filled the bucket in the fourth quarter to make a full -- almost full contribution to the 401(k) is for our employees, we anticipate that that will be at a full level in 2021, which will make those dollars higher, along with the expectation on other incentives.
On the costs for travel et cetera, we've all learned a lot this past year about how to conserve costs, how to save time, and it's not just in the -- on the factory floor, but in the front of office. And we will be monitoring that carefully. I don't see those types of spendings for travel and entertainment and such hotels and meals increased to the 2019 levels. They'll probably sneak up a little bit from 2020. But, I think we all learned some new things this past year. And we're going to take advantage of that to use our time more effectively.
That's helpful. Thank you.
Thank you. Next is a follow up question from Mig Dobre of Baird. Please go ahead.
Thanks for taking the follow up. Just a quick one, Bob, you talked about the M&A environment. And I think I heard you say that it was kind of slow. So I guess my question is, I know them before the pandemic, did you guys had a pretty active and fairly full pipeline and you operate, obviously in a very fragmented industry? What are all the puts and takes here in terms of when some of these deals would become maybe available? And you'd start converting on that? Then I'm also kind of wondering if now that we've been through this sort of big shock, if your own thinking in terms of the things that you'd like to add to your portfolio change, right. I mean, if you're either looking for sort of new geographies around the country or new verticals that you might not have examined before or even sort of new manufacturing capabilities that extend beyond the core of what Mayville Engineering has been known for?
I guess, Mig, I'll take a couple of pieces here. Those prospects that we had are still there. And some of them have retrenched and are waiting for a better day to present themselves for sale. I think that's both from a PE standpoint and from a private owner standpoint. But we still have those contacts and it just doesn't seem as robust today as it had done. I think that will change over time. As people figure out the end of COVID and all the other risks and issues that are out there.
With regard to what we're looking for, our definition is still the same and product line expansion, product line extension, geographic expansion, and then looking for the markets to serve. So now, between doing that through M&A or through internal growth, if we can do it in a in a meaningful way with the internal growth, it seems like a more cost effective way to do it. And, we will always try to prioritize the best return opportunities and achieve all those investment criteria. And so it can be both.
Well, if opportunities don't avail themselves to you. Based on just my own modeling, it looks to me like your leverage ratio will exit 2021 close to close to zero. And I'm wondering if that's the case at that point. Would you consider some form of returning capital to your shareholders either in a special dividend or something like that?
Yes. So we've got three things that we invest in. One is, we have -- we still have some more internal ROI opportunities to help us be even less dependent on people by doing re-deployable automation. Secondly, we have internal growth opportunities. And as we address those, that will be with as much automation as possible. And then thirdly, would be M&A opportunities that will be another use of cash. So all three of those things will be going on this year. And the mix today, I can't sit here and tell you what that's going to be. But I don't think our balance sheet will be debt free at the end of the year. There's opportunities for growth, and we're going after that.
All right, fair enough. Thank you, guys.
Thank you. The next question is from Chip Rewey of Rewey Asset Management. Please go ahead.
Good morning, guys. A couple of quick questions, more one-on-one type stuff for you. I understand you have the raw material pass through but especially with steel popping, wondered if there's a lag on those contracts where it's a 90-day lag or anything like that. And I guess I'll just ask for and you can dig into these last two as deeply as you want on the call. On the construction side, can you just break out top line resi versus commercial? And on the commercial vehicle, again are you in the engine or are you in the tractor and the trailer and for that market specifically? How much forward visibility do you have -- do you see to short-term or do you can you see longer term 6 to 9 to 12 months [indiscernible] ?
I'm going to ask Ryan Raber to address those more details on that.
Yes, the commercial vehicles mainly heavy duty and medium duty truck not really much trailer in there obviously have long range forecasts to use from industry publications, but generally 3 to 12 months of visibility from the customers. On the construction market, we don't really have any top line breakout we do by -- I'll say the sub sector, so nothing to note there. Can you remind me your first question that you asked?
Sure, just on the raw material pass through, do you guys have a 30-day, 60-day, 90-day lag that we have to just think about?
Yes, all those tend to be a little bit different based on who the customer is we have some that are kind of more real time where you're looking on monthly. There's others that look at quarterly. So it really depends on which customer they each kind of run their own individual program consistent over time. So if there is any lead lag that always kind of works its way out as you go up and down through the cycles.
Very monetarists on that topic or what I should say.
This concludes our question and answer session. I'd like to turn the conference back over to Mr. Bob Kamphuis for closing remarks. Thank you.
Thank you all. Thank you for your time today and your continued interest in MEC. We look forward to talking with you at conferences, whether they're in person or electronic and roadshows throughout the year. Thanks again for your time and interest.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.