Mueller Industries, Inc.

Good day, ladies and gentlemen, and welcome to the Miller Industries third quarter 2019 results conference call. Please note this event is being recorded. And now at this time, I would like to turn the conference over to Brendan Dunlap at FTI Consulting. Please go ahead, sir.

Thank you. Good morning, everyone. I would like to welcome you to the Miller Industries conference call. We are here to discuss the company's 2019 third quarter results, which were released after the close of market yesterday. With us from the management team today are Bill Miller, Chairman of the Board, Jeff Badgley, Co-CEO, Debbie Whitmire, Executive Vice President and CFO, and Frank Madonia, Executive Vice President, Secretary, and General Counsel. Today's call will begin with formal remarks from management, followed by a question and answer period. Please note in this morning'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. With these formalities out of the way, I'd like to turn the call over to Jeff. Please go ahead, Jeff.

Thank you, and good morning. We're pleased to discuss our third quarter results with you today. This was a solid quarter. Miller Industries increased its gross profits expanded its gross margins, and continued to strengthen its balance sheet. This strong execution during the third quarter reflects our continued focus on driving operational excellence across our business. Revenue during the third quarter declined one-tenth of one percent to $195.5 million versus $195.7 million a year ago, which reflects temporary supply chain challenges with certain chassis manufacturers. These challenges have been addressed by both the suppliers and ourselves, and we do not anticipate this will impact the fourth quarter. Despite these temporary challenges, we were able to increase gross profits by 1.3% year over year to $21.7 million. and expand our gross margins 10 basis points year-over-year to 11.1%, which reflects our strong cost control discipline. As such, net income was $8.1 million, or $0.71 per share, compared to net income of $8.7 million, or $0.76 per share in 2020. the third quarter of 2018. Additionally, during the quarter, we continued to invest in our business by enhancing our software capabilities to better serve our customers, which resulted in a 50 basis point increase in SG&A as a percentage of net sales to 5.3%. The investments we are making in technology will enable us to increase our administrative efficiency improve our data analytic capabilities, and increase our service levels for our customers. We are currently in the early phases of rolling out this new technology, and I am pleased to announce that the implementation is on schedule. As we move into the fourth quarter, we remain confident in the underlying strength of our business, both domestic and international. and are committed to providing best-in-class service to our customers while investing for long-term growth. Further, our balance sheet remains healthy as we continue to pay down debt and strategically deploy our resources to drive long-term organic growth and profitability to meet the demand of our customers and create sustainable value for our shareholders. we remain confident in our competitive position and in our financial outlook. Now I'll turn the call over to Debbie, who will review the third quarter financial results. After that, I'll be back with comments about the market environment and some closing remarks. Debbie?

Thanks, Jeff. Good morning, everyone. Net sales for the third quarter 2019 were $195.5 million versus $195.7 million for the third quarter of 2018, a 0.1% year-over-year decrease driven by temporary supplier-related delays mentioned earlier. Cost of operations decreased 0.3% to $173.7 million for the third quarter of 2019, compared to $174.2 million for the third quarter of 2018, as a result of our continued commitment to increasing production efficiency. Cost of operations as a percentage of net sales contracted approximately 15 basis points to 88.9% from the prior year period. Gross profit of $21.7 million or 11.1% of net sales for the third quarter 2019 compared to $21.5 million or 11% of net sales for the third quarter 2018. reflecting our stringent cost control efforts. SG&A expenses were $10.5 million for the third quarter 2019, compared to $9.5 million for the third quarter 2018. As a percentage of sales, SG&A increased approximately 50 basis points to 5.3% from 4.8% in a prior year period. driven by escalated marketing efforts and investments we've made to implement our new systems technology. Interest expense net for the third quarter 2019 was $424,000 compared to $525,000 for the third quarter 2018, which decrease was primarily due to increases in interest income on distributor receivables. Other expense for the third quarter 2019 with a net expense of $231,000 compared to a net expense of $76,000 for the third quarter 2018 due to currency exchange rate fluctuations. Net income for the third quarter 2019 was $8.1 million or 71 cents per diluted share. Net income for the third quarter 2018 was $8.7 million or 76 cents per diluted share. Now, let me briefly review the results for our nine months into September 30, 2019. Net sales for the first nine months of 2019 were $615 million, compared to $531.7 million in the prior year period, an increase of 15.7%. Gross profit for the nine months into September 30, 2019 was $69.6 million, or 11.3% of sales, compared to $61.1 million or 11.5% of sales for the first nine months of 2018. Net income for the first nine months of 2019 was $27.4 million or $2.41 for diluted share, an increase of 19.5% compared to net income for the first nine months of 2018 of $22.9 million or $2.01 for diluted share. Now turning to our balance sheet, cash and cash equivalents as of September 30th, 2019 was $27.5 million compared to $27.2 million as of June 30th, 2019 and $27 million at December 31st, 2018. Accounts receivable at September 30th, 2019 totaled $165.8 million compared to $197.8 million as of June 30, 2019, and $149.1 million at December 31, 2018. Inventory were $98.1 million as of September 30, 2019, compared to $91 million as of June 30, 2019, and $93.8 million at December 31, 2018. Accounts payable at September 30th, 2019 was $114.9 million compared to $129.4 million as of June 30th, 2019 and $98.2 million at December 31st, 2018. We reduced our long-term debt by approximately $10 million during the quarter from the prior quarter, bringing the balance to approximately $10 million as of September 30th, 2019. Overall, our balance sheet remains strong, and we continue to generate solid free cash flow, which provides us with financial flexibility to invest in our business and continue to drive long-term shareholder value. Lastly, the company also announced that its board of directors approved our quarterly cash dividends of 18 cents per share, payable December 16th, 2019, to shareholders of record at the close of business on December 9th, 2019. Now, I'll turn this all back to Jeff for further remarks.

Thank you, Debbie. Our performance this quarter was very encouraging, as we were able to overcome challenging circumstances faced during the quarter. Reflecting on the first nine months of 2019, we are extremely pleased with our performance. Specifically, the year-over-year revenue increase during the first nine months of $83.3 million, along with a gross profit increase of $8.5 million and a 40-cent increase in net income per diluted share. As we move toward year end and look forward into 2020, we continue to be confident in the strength of our backlog and the underlying positive fundamentals in all our end markets. To underscore our continued commitment to returning shareholder value, we have declared our quarterly dividend of 18 cents per share. Finally, we are confident that we will continue to benefit from our strategic capital investments while we continue to explore future opportunities. In closing, I'd like to thank our employees our customers, suppliers, and shareholders for their ongoing support of Miller Industries. With that, we're ready to take your questions. Thank you.

Thank you. And ladies and gentlemen, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for a moment to allow everyone an opportunity to signal for questions.

Our first question today will come from James Lee with Patrio Capital.

Thanks for taking my call. The supply chain issues regarding chassis, did it impact domestic or was it also international as well?

No, the supply chain issues on revenue were purely domestic.

Okay. So I see that's domestically that you guys – You're up to 11%. If you didn't have the supply chain issue, what do you think your growth would have been?

We believe that the supply chain issue with the chassis had 3% to 4% impact on total revenue.

Okay, total revenue, not just domestic. No, total revenue.

And you said that's been fixed, so that shouldn't impact Q4, correct?

Yeah, we're on the right track in Q4.

Okay. So it sounds like there should be some backlog that will get pushed to Q4 because of the supply chain issue that you should see sort of a rate of delivery in Q4 from the delay in Q3.

I don't know that it will be totally additive, but I'm not going to disagree with your statement. But we are back on the right track with our chassis deliveries.

And internationally, is it better to read from your press release that you expect international growth to bounce back to be positive in Q4?

Well, we certainly, due to timing of certain contracts, Q3, deliveries were down. We have started those contracts, and in fact, in Q4, have already started delivering on those contracts. So I would expect us to get back to a normalized range, yes.

Yes. Okay. And that normalized means growth, correct? Because I think it's a pressure release.

it reads like, I think you said it's just an increase in deliveries in fourth quarter, so I'm expecting... We will increase deliveries in the fourth quarter over the third quarter. That is for sure. Long-term growth. We have been very successful in military contracts and some foreign contracts with companies. I would expect that we will continue to be successful, especially on the military side. But to look at the 2020 growth perspectives over 2019, I think we're there based on the backlog. But again, there are certain delivery timing issues that I haven't completely gone through. or performance of those contracts, and I don't want to mislead you. So I can do that. I have the ability to do that, and I apologize that I haven't.

Okay. As you talk to your dealers, have you heard from any dealers that have expressed macro concerns, you know, in the U.S. or internationally? and whether that has impacted their deal inventory?

Our dealers are still reporting strong sales and a busy environment domestically. So I don't know that they've impacted their inventory levels. Our dealers are very good business people. Their inventory... I have not checked their inventory levels because I have international responsibility. But I don't think they've been impacted. In other words, I don't think they're slowing down. Things in the market seem to be very, very good.

And that's in the U.S. What about internationally? Because I think you guys called out Brexit.

Yeah, I don't think Brexit will have any significant impact to Miller Industries overall. Our UK subsidiary mainly sells in the UK. Their customer base is in the UK and does very little export business out of the UK. So although I can't guarantee that, I can't guarantee what their currency is going to do, I can't guarantee what the psychological effect Brexit will have on the customer base. But overall, I don't think it will have a significant impact to Miller Industries.

Okay. And I noticed your CapEx capital expenditure this year is starting to ramp again. Could you discuss why? Because my understanding is that CapEx should have normalized to a lower level after your plant renovation has completed.

Debbie, I'm going to turn that one over to you.

Okay. Thanks, Jeff. Part of the CapEx for the year is the investment in the systems technology that we mentioned in the 10-Q. We have started the road of upgrading our ERP system. and adding on some different modules to that for data analytics, artificial intelligence, that type of technology. So, part of that capital expenditure is to invest in that future technology.

What do you think the, how do you think CapEx will trend both this year and next year?

Now obviously we've got some maintenance coming up for some of our assets that we've put in place over the last few years. I would say it's going to trend pretty much the way that it has been in the last few quarters. You know, as we look for opportunities both on innovation of our product and investment robotics, 3D printing, any of those opportunities that might arise as well as the technology stocks. I think we'll try to take advantage of those opportunities. So, I wouldn't be conservative with it because we do like to take advantage of those opportunities when they arise.

I'm just trying to figure out whether, what should we expect CapEx potentially to trend back towards the level that you guys have seen in the past before the factory, the expansion?

I would say a good average to use would be 15 million for the year. But again, you know, as opportunities arise, we may take advantage of those, but, you know, a normalized run rate would probably be in the neighborhood of 15 million.

And that's the rate we should look forward to over the next few years, not just this year or next.

Well, we certainly hope that's the case, but opportunities do present themselves. And if we're given the opportunity to increase shareholder value by making the proper CapEx expenditure, we will take advantage of that, especially with our financial position and our debt levels being so low. So, yeah, that would be the plan.

Yeah, Jeff and Lee, this is Bill Miller. I think that what you have to keep in mind, and having been the founder and built the company, All of our growth historically, which is averaged over, I think our internal growth rate's been over 12% for the entire life of this company, is all done internally with R&D, new products, new ideas. As Jeff was commenting as to the current attitude of the distributors, we just introduced a new 100-ton rotator system. at a special showing of which, what was it, Jeff, 1,500 of our distributors and best customers paid their own way there to see it. They were all extremely excited. So I know that they're in very good stead. But I also know that if we don't invest in our CapEx, we will not be able to continue to get this over 10% per year kind of growth rate. A good example and part of the issue, we just built a whole new R&D center just for the projects that are on the future and the forefront right now so that we can continue to get this kind of growth rate looking forward. So we spend money To generate money, our returns are – the board doesn't like to look at anything under 30% unless it's a capital constraint kind of issue, capacity constraint. So, yeah, we spend a little money, but our return is very large compared to making acquisitions or some other alternative.

Got it. So I suppose I'm looking at a CapEx level prior to your factory expansion. I think it was, you know, they wrote a $5 million, $10 million per year before that. So that's not a level that we should be thinking about going forward. It won't be that low.

Well, the only thing I would realize, Debbie, what is our depreciation rate up to? I seem to remember it's about $15 million. Yeah, $12 million, you got a little bit more. And we historically have tried to stay on that kind of a track to continue to replace and build our plant, other than this expansion, which was not a staying up to snuff, but a better idea. And we have an R&D business out there, and you look at CapEx right now, our R&D business that we go at to build these new products, thanks to the current situation, we're able to recover that cash. So we are all about new products, new ideas, and future growth through internal growth.

Got it. We'll ask questions on capital allocation. Assuming your demand environment remains strong and It's not like CapEx is going to be like what it was when you guys were expanding your factory. You should be starting generating more free cash flow. How do you guys think about return on capital to shareholders either by increasing dividend or perhaps stock buyback?

We do everything we can, and we will continue to do everything we can to give a great return to our shareholders. which includes, as you said, dividends, stock buybacks. Those are items that our board considers every quarter. And as we feel comfortable with them, we move forward with them. We kind of put a little freeze on dividend for the last little period because of the CapEx we were spending. and the lack of timing between when we generated the cash and when we had to spend the cash. So we used our bank loan to offset that. Now, as you can see, we've almost got it all paid back now. And we would hope that in the near future we'd be back to a zero debt. And at that point, we start to look at other ways to – enhance our shareholder value.

Are there any big capital projects that you see on the horizon that may constrain your return of capital to shareholders?

No. I don't see them. Jeff, do you see any? No, sir. Right now, I don't see any that are in front of us that would have some kind of a A restraint like the $50 million we had to spend to be able to jump from $500 million to have capacity to get to $800 million, $900 million, whatever the customer's demand.

Got it. Great. Thank you.

Thank you. And just a reminder, ladies and gentlemen, it is Star 1 to ask a question at this time.

And with no further questions in the queue, that does conclude today's question and answer session. I would like to call back over to Mr. Jeff Baddeley for any additional or closing remarks.

We'd like to thank you for joining us on our Q3 Q&A. conference call, and we look forward to talking to you and reporting our Q4 results in our next call. Thank you very much.

And with that, ladies and gentlemen, that concludes today's conference call. We would like to thank you again for your participation. You may now disconnect.