Earnings Call Transcript - MLR Q1 2025

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Miller Industries First Quarter 2025 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 at FTI Consulting. Please go ahead, sir.

William Miller, President and CEO

Good morning, everyone, and thank you for joining us today. Miller Industries is the world's largest manufacturer of towing and recovery equipment. Our product lines span light, medium and heavy-duty recovery vehicles, car carriers, military recovery solutions and more. With 10 manufacturing facilities across the United States, France and the U.K., we are uniquely positioned to serve our global customer base. Our long-standing leadership in the industry is built on a foundation of exceptional people, best-in-class products and the strongest distribution network in the towing and recovery market. Moving to our first quarter performance. Despite macroeconomic uncertainty, we are pleased with the results that align with our expectations. We continue to execute on our strategy of returning to a normalized channel flow, which will position us for growth in the future. We have used this period as an opportunity to reduce field inventory and product lead times, streamline operations, evaluate our supply chain and return capital to shareholders. Now I'll turn the call over to Debbie to walk through the quarter in more detail, and I'll return later to speak on our outlook, regulatory developments and capital allocation.

Deborah Whitmire, Executive Vice President and CFO

Thanks, Will, and good morning, everyone. For the first quarter of 2025, net sales were $225.7 million compared to $349.9 million in the same quarter last year, a decline of 35.5%. This was largely driven by chassis shipment patterns normalizing after prior irregular deliveries from OEMs as they emerged from supply chain disruptions. Gross profit for the first quarter was $33.9 million or 15% of net sales compared to $44.2 million or 12.6% of net sales for the same period in 2024. The margin improvement was due in part to product mix with a higher percentage of body deliveries relative to chassis shipments. As always, margins are sensitive to this mix, and this quarter, it plays to our advantage. Net income for the first quarter of 2025 was $8.1 million or $0.69 per diluted share compared to net income of $17 million or $1.47 per diluted share in the prior year period. As Will alluded to, during the quarter, we returned $4.4 million to our shareholders, comprised of $2.1 million of share repurchases and the remaining balance of our industry-leading dividend. The Board also recently approved a quarterly cash dividend of $0.20 per share payable June 9, 2025, to shareholders of record at the close of business on June 2, 2025, the 58th consecutive quarter that the company has paid the dividend. Returning capital to our shareholders has always been a core part of our identity and will continue to be a key area of focus as we move forward. Shifting to the balance sheet. We have a cash balance of $27.4 million as of March 31, 2025, compared to $24.3 million as of December 31, 2024. During the quarter, we reduced accounts payable by nearly $33 million. We also improved collections on our accounts receivable, which declined by roughly $21 million compared to year-end. We expect our receivables to continue to convert into cash at a faster rate as inventory levels for both Miller Industries and our distributors normalize in the second half of 2025. Inventories were $164.9 million as of March 31, 2025, compared to $186.2 million as of December 31, 2024. We're seeing a gradual decline from inventory levels following the strategic investments we made in inventory throughout 2024 to meet the increased demand levels we witnessed. While inventories and working capital remain slightly elevated, the increased inventory levels have proved advantageous in the current environment, providing us with greater flexibility and reaction time as market conditions and tariff developments evolve. That said, we're proud of the progress we have made to reduce our working capital thus far, and we'll continue these efforts to improve free cash flow generation through the remainder of 2025. Our debt balance was $75 million as of the end of the first quarter. And while we feel comfortable about our current leverage position, we have historically been a debt-averse company. Reducing our debt levels will continue to be a key focus as cash conversion improves. As I stated before, our blended margin comprised of chassis and unit margins is correlated directly to our product mix. On Slide 6, you'll see that we've illustrated this dynamic visually to provide a clear explanation. We explained last quarter how post-COVID supply chain disruptions led to increased volatility in chassis deliveries and therefore, increased fluctuations in our margins. As you can see, this quarter, gross margins remained relatively stable, even while chassis deliveries picked up slightly. Looking ahead, as chassis deliveries continue to increase, we would expect an inverse relationship with gross margins. I'd like to again reiterate that this is not a demand issue. Demand remains strong. The challenge has been inconsistent deliveries from our suppliers, which have resulted in a strain on our distribution channel's ability to deliver finished units. Now I'll turn the call back to Will to discuss some key considerations for 2025.

William Miller, President and CEO

Thank you, Debbie. I'd like to provide some insight into what we see moving forward. First, the chassis situation. Our decision last year to hold deliveries allowed our distribution partners to begin to work through elevated inventory. This was a deliberate move that may have impacted near-term sales but was critical to protecting the health of our channel. As a result, both body and chassis inventory levels are now approaching normal levels. I will get into more detail on this dynamic in the following slide. Second, global military demand remains robust. We're seeing continued RFQ activity for military vehicles, both domestically and internationally. This is a positive signal and one we are prepared to respond to. Third, while the tariff environment continues to evolve, we've taken proactive steps to ensure we remain well positioned regardless of the outcome. We recently implemented a tariff surcharge on all new orders of manufactured products as well as an additional price increase on all accessories and parts sales. We continue to diversify our supply chain where we can, including further reduction of our already minimal exposure in China. That said, many critical components used in our products are not available domestically and full onshoring of our supply chain is not currently feasible for us or anyone else in our industry. However, we remain confident that the diversity and strength of our supply chain will allow us to navigate the uncertainties. We continue to actively monitor these developments and we'll adjust guidance accordingly as more clarity emerges. Fourth, what remains a point of uncertainty is the Advanced Clean Truck regulation, which affects our ability to supply our existing products to customers in six large states. We are aware of the ongoing regulatory activity to revoke the ACT waiver that supports these regulations, but we're planning as if no material changes will occur as a result of this activity. As I mentioned last quarter, we expect one of our major suppliers to begin delivering CARB-compliant chassis later this year with broader availability in early 2026. This gives us confidence in our ability to meet customer needs over time, even with no change in the regulatory environment. Lastly, despite some uncertainty, we feel very comfortable in our ability to improve free cash flow generation, and we'll continue to prioritize returning capital to shareholders and paying down our debt balance with this cash flow. Slide 8 gives an updated picture of the inventory activity in our distribution channel. We entered last year with constrained inventory, saw an influx of chassis in Q1, Q2 and Q3, and chose to slow down deliveries in Q4 to maintain a healthy distribution channel, which is critical to our success. Now we're seeing inventory continue to decline, particularly chassis inventory, with both bodies and chassis moving towards optimal levels. This gives us the confidence that we will not only be able to collect receivables and convert cash in a more timely manner, but also accelerate sales in the second half of the year. Moving on to the CARB and the Advanced Clean Truck initiative. The situation remains dynamic, making it difficult for us to forecast if and when we may be able to resume normal operations and satisfy the continued buildup of demand we have from customers in these states. However, there have been some notable updates. On April 14, the Massachusetts DEP announced a delay in its ZEV requirement for chassis OEMs. Additionally, the U.S. House of Representatives recently passed Joint Resolution 87, aiming to revoke the waiver that allows California and other states to enforce the ACT regulation. Additionally, the Senate has proposed Senate Bill 996 to amend the Clean Air Act. Regardless of the outcome, we are positioning the company to adapt. Our investments in lobbying compliance and product alignment will serve us well in a dynamic regulatory landscape. Our suppliers are also making efforts to become CARB-compliant as early as the end of 2025. We continue to believe these regulations unnecessarily impact our downstream customers who face strong demand but lack access to compliant products. As CARB-compliant vehicles begin to roll out, we expect this pent-up demand to be normalized in 2026. Now shifting gears to capital allocation and our continued focus on our strategy and priorities. In line with our long-standing business practices, we continue to prioritize returning capital to our shareholders. Our quarterly cash dividend of $0.20 per share increased by 5.3% compared to the prior year. Additionally, we repurchased $2.1 million of stock in the first quarter and still have $20 million remaining on our share repurchase program. Consistent with our company's long-standing practices, we will prioritize reducing our debt balance to maintain flexibility and be in a position to take advantage of future opportunities. And lastly, we continue to evaluate capacity expansion, both domestically and in Europe. As mentioned earlier, there is strong activity in the military sector, which we are monitoring closely. As always, we will prioritize innovation, automation, and investing in our people, as it is what has led Miller Industries to become the world's largest manufacturer of towing and recovery equipment. Looking ahead, we are reaffirming our full-year revenue guidance of $950 million to $1 billion, which would be our third-highest performance on record and continue to expect an EPS range from $2.90 to $3.20 per diluted share. We anticipate our annual gross margin to be comparable to the prior year in the range of 13% to 13.5% and SG&A as a percentage of sales for the full year to be approximately 9.5%. This guidance assumes no major changes in regulations, unforeseen supply chain issues, or significant tariff impacts. We believe we are well positioned for ongoing improvement and strong free cash flow throughout the second half of the year with significant growth potential in 2026 and beyond. To close, we are pleased with our current position. Underlying fundamentals in our end markets are strong, and we're excited about our strategy as planned. We're executing on our strategy and continuing to strengthen our business over time and returning capital to shareholders. Our leading position in this industry is the result of decades of focused investments in our people, our products, and our partners. Our foundation remains strong, and we look forward to the opportunities that lie ahead. In closing, the entire management team and I would like to thank all of our employees, suppliers, customers, and shareholders for their continued support. At this time, we'd like to open the line for any questions.

Michael Shlisky, Analyst

I guess, first off, can you talk about broad demand for tow trucks regardless of who's buying the chassis? I guess I'm kind of curious how order trends during the first quarter in units? And has that continued into April and May?

William Miller, President and CEO

Retail activity that we can see through our distribution channel remains consistent with the last few quarters. We believe that similar to last year, there's still a lot of uncertainty in the marketplace, customers waiting to see the total impact of the tariff situation as well as waiting to see what potential tax incentives and what gets passed through the tax bill up and coming.

Michael Shlisky, Analyst

Could you provide a general estimate of how much of your cost of goods sold comes from China? Given the current situation, has the implementation of tariffs significantly influenced your guidance, or are you simply observing the developments as they unfold?

William Miller, President and CEO

The tariff situation is currently quite volatile and open-ended. We have announced a price increase to address this, including a surcharge on all new orders. Additionally, we implemented a price increase on parts and accessory sales last month to be proactive about potential future changes. In terms of our purchases from China, our exposure from Miller Industries is minimal. I cannot comment on the effect on the broader supply chain or what others may purchase from China, but directly, it's negligible. We source products from various regions, including the EU, Mexico, and Canada. It's crucial for us to monitor the final outcome of the tariff situation, but it is challenging to determine the overall impact with limited information. We are keeping a close eye on it and will adjust as necessary.

Michael Shlisky, Analyst

Great. And then on the gross margin side, you just did 15% in the first quarter, and you still maintain, if I heard you correctly, well, 13% to 15% to 25% for the full year. Even when you were shipping a really large number of the full package from Miller, it was still in the 13s. So I'd be curious, are there any headwinds you should be thinking about in the back half of the year that I'm not thinking about? Or are you just trying to keep things cautious until the tariff situation plays out?

William Miller, President and CEO

No. I think we're cautiously optimistic with regards to tariffs and everything else and how they may impact us from a gross margin perspective. Yes, you are correct that annualized last year, we were in that 13%, 13.5%. We've had a good start. We do anticipate chassis shipments to increase throughout the remainder of the year, which will certainly have some downward effect on the margins, but then also just being somewhat cautious with the unknown landscape moving forward.

Michael Shlisky, Analyst

Great. And maybe one last one for me. Can you outline just a little more comment on the chassis inventory situation at the dealers? The chart was very illuminating, but it's hard to really tell. Can you just give us a sense as to how many months do you think are left until the dealers are at the correct number? And how it's gone so far this year, has it performed what you expected?

William Miller, President and CEO

Yes. So as you saw from the chart, chassis have now dropped below body inventory, which is a positive direction for us. They're still relatively close. It's a lot of small numbers, right? So the two graphs are still pretty in line with one another. We anticipate another 30 to 90 days of probably additional inventory and field inventory before we really start to see chassis orders start to pick up back to normalized levels, except those states that are CARB-compliant like California, as soon as they can start to receive CARB-compliant chassis that they've placed orders for this year, they certainly are looking to capitalize on that as quickly as possible.

Operator, Operator

Your first question comes from the line of Mike Shilsky from D.A. Davidson.

William Miller, President and CEO

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 second quarter conference call. If you would like information on how to participate and ask questions on the call, please visit our Investor Relations website, millerind.com/investors or e-mail investors.relations@millerind.com. Thank you, and may God bless you all.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.