Miller Industries Inc /Tn/ Q2 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the Miller Industries Second Quarter 2022 Results Conference Call. Please note, this event is being recorded. And now at this time, I would like to turn the call over to Mike Gaudreau of FTI Consulting. Please go ahead, sir.

Thank you, and good afternoon, everyone. I would like to welcome you to the Miller Industries conference call. We are here to discuss the company’s 2022 second quarter results, which were released after the close of the market yesterday. With us from the management team today are Bill Miller, Chairman of the Board; Will Miller, President and CEO; Jeff Badgley, President of International and Military; Debbie Whitmire, Executive Vice President and CFO; Frank Madonia, Executive Vice President, Secretary and General Counsel; Vince Tiano, Chief Revenue Officer; and Jamison Linden, Chief Manufacturing Officer. Today’s call will begin with formal remarks from management followed by a question-and-answer session. Please note, in this afternoon’s conference call, management may make forward-looking statements in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. I’d like to call your attention to the risks related to these statements, which are more fully described in the company’s Annual Report filed on Form 10-K and other filings with the Securities and Exchange Commission. And at this time, I’d like to turn the call over to Will. Please go ahead, Will.

Thank you, and good afternoon, everyone. In the second quarter, demand remained strong. But our results continue to reflect the impact of supply chain shortages and inflationary pressures. Sales in the second quarter increased 11.2% to $201.5 million compared to the second quarter of last year. However, sequentially, sales declined 6.5% from the first quarter of 2022 due largely to part shortages that impacted the amount of finished goods we were able to deliver during the quarter. Gross profit for the second quarter was $18.4 million, a decrease of 10.8% compared to the prior year quarter, while gross margin of 9.1% declined 230 basis points year-over-year. Though significant inflation has continued to drive difficult year-over-year comparisons, we are encouraged by our sequential 19.8% improvement in gross profit and 200 basis point improvement to gross margin in comparison to the first quarter of 2022. While we haven’t realized the full benefit of our price increases, some of which only flowed through to results in June, we are encouraged that even a portion of our price increases were able to drive sequential improvement despite the macroeconomic environment and unfavorable product mix. Despite challenges in delivering finished goods, demand remained strong as backlog grew substantially in the second half of 2021 and has remained very stable to date in 2022. Because of the high demand levels, we are cautiously optimistic that top line growth will improve over the balance of the year, pending part availability. To date, the conflict in Ukraine has not caused a significant slowdown in order rates or any order cancellations, and there have been minimal impacts to operations in our European markets. That said, the international business is still subject to the same supply chain constraints and inflationary pressures that the entire globe is facing, but we are encouraged by the continued demand for our products in these markets. Now I’d like to turn the call over to Debbie, who will review the second quarter financial results in more detail. Following her remarks, I’ll give a market update and provide some closing comments. Debbie?

Thanks, Will, and good afternoon, everyone. Net sales for the second quarter 2022 were $201.5 million versus $181.2 million for the second quarter of 2021, an 11.2% year-over-year increase driven largely by the strong demand for our products. Cost of operations increased 14% to $183.1 million for the second quarter 2022 compared to $160.6 million for the second quarter 2021. The increase in our cost of operations is due largely to part scarcity and higher prices for our components compared to the prior year period. Cost of operations as a percentage of net sales increased approximately 230 basis points from the prior year period to 90.9%. Gross profit was $18.4 million or 9.1% of net sales for the second quarter 2022 compared to $20.6 million or 11.4% of net sales for the prior year period. The year-over-year decline in gross margin was driven by the inflationary and supply chain challenges referenced earlier. SG&A expenses were $12.7 million in the second quarter 2022 compared to $12 million in the second quarter of 2021 due to investments in human capital and increases in employee benefit costs. As a percentage of sales, SG&A decreased approximately 30 basis points to 6.3% from 6.6% in the prior year period. Notably, we have seen a decrease in turnover and significant decline in COVID-related absenteeism in the last 90 days, two data points that give us great confidence that we are moving toward a more normalized working environment. Interest expense net for the second quarter 2022 was $628,000, up from $340,000 for the second quarter of 2021, primarily related to increases in distributor floor plan financing costs that flex up and down with revenue along with an increase in our debt levels. Other income and expense for the second quarter 2022 was a loss of $275,000 compared to income of $48,000 for the second quarter of 2021, attributable largely to currency exchange rate fluctuations. Net income for the second quarter 2022 was $3.8 million or $0.33 per diluted share compared to net income of $6.5 million or $0.57 per diluted share in the second quarter of 2021 for decreases of 42.3% and 42.1%, respectively. Before moving to the balance sheet, I’d like to quickly recap our results for the first half of the year. Net sales for the first 6 months of 2022 were $417 million compared to $351.1 million in the prior year period, an increase of 18.8%. Gross profit for the 6 months ended June 30, 2022, was $33.7 million or 8.1% of sales compared to $36.4 million or 10.4% of net sales compared to the same period last year. Net income for the first half of 2022 was $5.8 million or $0.51 per diluted share compared to net income for the first half of 2021 of $9.7 million or $0.85 per diluted share, decreases of 39.9% and 40%, respectively. Turning to the balance sheet now. Cash and cash equivalents as of June 30, 2022, was $31.1 million compared to $29.3 million as of March 31, 2022, and $54.3 million as of December 31, 2021. Accounts receivable as of June 30, 2022, was $191.2 million compared to $193.9 million as of March 31, 2022, and $154 million as of December 31, 2021. Inventories were $141.2 million as of June 30, 2022, compared to $124.3 million as of March 31, 2022, and $114.9 million as of December 31, 2021. Accounts payable as of June 30, 2022, was $137.7 million compared to $139.3 million as of March 31, 2022, and $119 million as of December 31, 2021. During the quarter, we drew an additional $30 million against our revolving credit facility for working capital needs, and we drew an additional $5 million after quarter-end as we continue to build inventory while awaiting final parts for ultimate delivery to our customers. We also secured a commitment from our primary lender to expand our existing loan agreement from $50 million to $100 million on substantially the same terms and with the same May 31, 2027 maturity date. While we have taken a disciplined approach to building inventory, we view this as a prudent strategy despite higher working capital needs. At a time when many competitors are cutting their expenditures, we continue to press forward and position ourselves for the supply chain recovery in an effort to gain market share from those who have cut spending. That said, as always, we continue to use an abundance of caution when making any capital allocation decisions and we’ll continue to allocate capital in places that we feel will generate the most value for our stakeholders. Lastly, the Board of Directors approved our quarterly cash dividend of $0.18 per share payable on September 12, 2022, to shareholders of record at the close of business on September 5, 2022, marking the 47th consecutive quarter that the company has paid a dividend.

Thank you, Debbie. While we are experiencing top line challenges this quarter, we are pleased with our sequential margin improvement and our prospects for driving more bottom line growth as we move through the year and as our price increases are fully realized. Demand for our products is still strong, and we are committed to doing everything in our power to deliver on our commitments to our customers, partners, and suppliers in a timely manner. We are hopeful that supply chain and inflationary impacts will abate. However, we have positioned the business to continue to execute in this environment as if it is the new normal for the intermediate term. Rising interest rates continued with conflict in Europe, and the relative strength of the dollar are additional headwinds that have only added more uncertainty. However, we are encouraged by the long-term fundamentals in our markets. As we continue to cope with these impacts, we have made more proactive decisions that we expect to yield improvement in bottom line results as we move throughout the year and position us well for a macroeconomic recovery whenever that time may be. In closing, the entire management team and I would like to thank all of our stakeholders for their continued support of Miller Industries. At this time, we’d like to open the line for any questions.

Our first question comes from Arnold Ursaner with Miller Industries.

Actually, it’s a Family Office, I want to focus first on your dramatic increase in the credit facility. As you indicated, you took on $45 million to date and have expanded it to $100 million. I think you indicated primarily for working capital. Should we think of this as you referred to the new normal, or is this likely to be more a seasonal build in credit that should generate significant cash flow as you start getting out more finished product?

I believe you’re absolutely correct. I don’t know if it’s necessarily seasonal, but certainly, it’s needed at this moment in time. So we’ve seen an increase in all facets of our inventory level from raw materials to finished goods as we continue to produce product to the most finished level that we can so that as final component parts arrive, we can deliver that to the final customer as quickly as possible to meet demand. So in our opinion, it is temporary. I don’t know what the term of temporary means today, but I would not expect it to be our new normal.

Can you provide an update on your capital expenditures for the remainder of the year, considering the significant investment you made in building the new facility at the beginning of the year?

We’ve got several projects in the queue, primarily focused around robotics and automation. Just trying to make sure that we get as many efficiencies as possible through technology and automation. So we’re probably looking at more historical depreciation levels going forward.

In this call, you didn’t mention your labor situation. I can imagine that it’s gotten completely resolved in a short period of time, but perhaps freshen up how your incremental adds and training has gone on the labor side and the kind of efficiencies you’re achieving there?

I believe that at this time, most of our U.S. facilities are nearly fully staffed and meeting the needs of our operations team. As is typical, there is some turnover within the first 30 to 90 days when new employees are onboarded and do not meet expectations. However, in terms of training, we are observing reduced turnover and are implementing changes in our facility structure to provide more hands-on oversight and an additional level of supervision for our employees. I think this will benefit us for the rest of this year and into the future. Currently, we are managing well with our employee situation. The cost of labor in the market is somewhat higher than it has been, and it’s a strong market for job seekers, but we are doing quite well.

I have a couple of questions regarding your revenue trends for the quarter. First, could you provide some insights into the month-by-month cadence as you notice improvements in the supply chain, and has this trend continued into July? Secondly, in relation to revenue, could you discuss the proportion of volume growth compared to price increases? Additionally, could you elaborate on the unfavorable mix you've mentioned several times? I appreciate your help with these inquiries.

You want clarification or you want me to...

I wouldn’t say we see any trends right now in terms of month-to-month activity. It's entirely dependent on the supply chain at this point, and each day presents new challenges. As Will mentioned, we’ve increased our revenue and inventory across all areas to be prepared for any relief in the supply chain when it arrives. So if you have any insights about the month-to-month situation, please share them with us. Volume versus...

You didn’t see a meaningful change within Q2 month by month. Is that a correct statement?

That’s correct. Volume versus price. Sorry, go ahead.

No, that was my next question.

We shared the increases we've implemented, and as Will mentioned earlier, those were largely rolled out during the second quarter. I would estimate that about 75% of those increases occurred in that quarter. In terms of volume, we experienced a slight decline, but the pricing adjustments compensated for that. Overall, I would say there was significant growth attributed to the price increases during the second quarter.

You mentioned a surcharge that was implemented on April 1, ranging from 3% to 11%, along with a price increase in June. I'm not sure if you shared details about the June price increase, but my main concern is that most of the backlog was built up in 2021. I assume the surcharge affects that backlog. Are you currently in a position where every new order allows you to fully recover your costs? Additionally, I'd like your thoughts on when investors might expect to see normalized margins or levels that approach your 5-year average.

From a pricing standpoint, the majority of our backlog is now at current pricing. All price protections for the backlog through our four price increases and surcharges that were implemented in 2021 and early 2022 have taken effect as of June. Consequently, both new orders and backlog are priced at the current levels. Regarding margins, we believe that our price increases are helping us move toward more normalized margins. The product mix in 2019, before COVID, included a higher proportion of military products. While I can't say we are fully back to where we were, I believe the pricing changes are guiding us in that direction.

Okay.

And under constant review. So we are watching the margins as we produce the product month by month, and we’ll make adjustments as needed.

Deb mentioned that your volume might have been down slightly in the quarter. My question is, as I look to the second half of the year, assuming you can start to obtain the critical components you’ve been missing and volume increases, would you expect volume to improve considering the backlog you have for the latter half of the year, or is it entirely reliant on your ability to enhance the supply chain?

It is, in our opinion, 100% determined on the big if, which is when component parts arrive. We are working diligently with our sourcing and purchasing team as well as engineering and operations to make changes as quickly as possible to find alternate suppliers for primary component parts.

Are chassis still your biggest problem?

Chassis are an issue. But I don’t believe that today, from a finished product standpoint, our largest issue is still hovering around hydraulic components, winches, valves, cylinders, as well as electrical components. So remote controls and lighting control systems.

Well, I’ve asked you a lot of questions. So I’ll give others a chance.

Not a problem.

We have additional questions from Arnold Ursaner.

Can you please remind us of the key determinants of management compensation? I'm looking at your SG&A line which saw an increase, and I know there are various components. With revenues and operating income down year-over-year, are executive bonuses being affected, assuming they are performance driven? I don’t have the details on hand. If you could provide a reminder of the key factors that influence executive compensation?

Sure. There’s a new structure that was put in place in March of this year. So there is a release out there for that. But executive compensation is based on pretax income. So yes, certainly, lower pretax income will affect management compensation.

So the increase in SG&A is due to other factors. Sales commissions or other factors, is that correct?

It’s administrative staff and employee benefits. It is not related to management comp, if that’s your question.

Yes.

There are no further questions at this time. I’ll hand the floor back to management for closing remarks.

Thank you. I’d like to thank you all again for joining us on the call today, and we look forward to speaking with you on our third quarter conference call. Have a wonderful day.

Thank you. All parties may now disconnect. Have a great day.