Miller Industries, Inc.

Good day, ladies and gentlemen, and welcome to the Miller Industries second quarter 2020 results conference call. Please note this event is being recorded, and now at this time I would like to turn the call over to Brendan Dunlop at FDI Consulting. Please go ahead, sir.

Thank you, and good morning, everyone. I would like to welcome you to the Miller Industries conference call. We are here to discuss the company's 2020 second 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, Will Miller, President and Co-CEO, 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 formally described in the company's annual report filed on Form 10-K and other filings of 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, everyone. Over the last few months we have experienced an unprecedented health and economic crisis due to the COVID-19 pandemic. Despite the uncertainty caused by this crisis, Miller Industries has remained committed to providing best-in-class products to keep roadways clear around the globe. Moving on to our financial results, our performance during the quarter was significantly impacted by COVID-related shutdowns at our facilities, as well as shutdowns in our supply chain, which resulted in a decline in top line sales. Revenue during the second quarter decreased 42.2% to $128.5 million versus $222.3 million a year ago. as the economy was impacted by COVID-19 and shutdowns in our supply chain reduced our production levels. That said, we were able to quickly adjust our operations to reduce costs and minimize overall inefficiencies while continuing to meet the needs of our customers. Quarterly gross profits decreased by 29.7% year over year to $17.7 million. However, our gross margin expanded approximately 250 basis points year over year to 13.8% due to favorable product mix and operational adjustments made during the quarter. Net income was $5.8 million, or 51 cents per share, compared to net income of $10.7 million, or 94 cents per share, in the second quarter of 2019. Although market conditions remain unpredictable, we are confident in our ability to continue meeting the needs of our customers while maintaining stringent social distancing Sanitary protocols and other governmental guidelines to protect the health and safety of our employees. As we move into the second half of the year, we are working closely with our distribution network as they adjust their inventory to meet customer demand. Further, we continue to invest in technological improvements in our production facilities to increase overhaul production efficiency, and enhance the safety of our employees. I am pleased to announce the rollout of these improvements is progressing as planned. Despite the ongoing uncertainty in the broader market, these improvements will position us well to capitalize on future growth when the COVID-19 crisis subsides. Now I'll turn the call over to Debbie, who will review the second quarter financial results. After that, I'll be back with comments about the market environment and some closing remarks. Debbie?

Thanks, Jeff, and good morning, everyone. Net sales for the second quarter 2020 were $128.5 million versus $222.3 million for the second quarter of 2019. a 42.2% year-over-year decrease driven by ongoing impacts from the COVID-19 pandemic. Cost of operations decreased 43.8% to $110.8 million for the second quarter of 2020 compared to $197.1 million for the second quarter of 2019 due to the decline in our top line sales. Cost of operations as a percentage of net sales declined approximately 250 basis points to 86.2% from the prior year period. Gross profit was $17.7 million, or 13.8% of net sales for the second quarter of 2020, compared to $25.2 million, or 11.3% of net sales for the second quarter of 2019, reflecting favorable product mix and by minimizing operational inefficiencies as a result of adjusting production schedules and eliminating overtime. SG&A expenses were $10.1 million for the second quarter 2020 compared to $11 million for the second quarter 2019. As a percentage of sales, SG&A increased approximately 290 basis points to 7.8% from 4.9% in the prior year period. Interest expense net for the second quarter 2020 was $429,000 compared to $721,000 for the second quarter 2019 as we paid down our credit facility and saw decreases in floor plan interest payments. Other income expense for the second quarter 2020 was a net income of $275,000 compared to a net expense of $57,000 for the second quarter 2019 due to currency exchange rate fluctuations. Net income for the second quarter of 2020 was $5.8 million or 51 cents per share. Net income for the second quarter of 2019 was $10.7 million or 94 cents per share. Now let me briefly review our results for the six months into June 30, 2020. Net sales for the first six months of 2020 were $304.6 million compared to $419.6 million in the prior year period, a decrease of 27.4%. Gross profit for the six months ended June 30, 2020 with $36.3 million or 11.9% of sales compared to $47.8 million or 11.4% of sales for the first six months of 2019. Net income for the first six months of 2020 was $11.3 million, or 99 cents per share, a decrease of 41.8% compared to net income for the first six months of 2019 of $19.3 million, or $1.70 per share. Now turning to our balance sheet, cash and cash equivalents as of June 30, 2020 was $37.1 million, compared to $43.1 million as of March 31, 2020 and $26.1 million as of December 31, 2019. Accounts receivable at June 30, 2020 totaled $123.2 million compared to $168.9 million as of March 31, 2020 and $168.6 million as of December 31, 2019. Inventories were $99 million as of June 30, 2020 compared to $92.6 million as of March 31, 2020 and $88 million as of December 31, 2019. Accounts payable at June 30, 2020 was $59.5 million compared to $96.8 million as of March 31, 2020 and $95.8 million as of December 31st, 2019. As you recall in our first quarter earnings call, we preemptively drew down $25 million from our existing credit facility to ensure that we had sufficient liquidity to weather the COVID-19 crisis. During the second quarter, we repaid the $25 million we borrowed during the first quarter, reducing our current credit facility balance to $5 million as we are now confident that we have adequate liquidity to weather foreseeable impacts of the pandemic. Overall, our balance sheet remains strong and we believe we have sufficient capital resources to handle the challenging environment. Lastly, the company also announced that its Board of Directors approved our quarterly cash dividends of 18 cents per share, payable September 14, 2020, the shareholders of record at the close of business on September 7, 2020. Now, I'll turn the call back to Jeff for further remarks.

Thank you, Debbie. Will Miller and I are very proud of the continued dedication of our employees throughout the ongoing pandemic. Our unwavering commitment to operational excellence and best-in-class customer service provides us with the expertise and capability to meet the needs of our customers despite the challenging economic environment while taking precautions to provide a safe work environment for our employees. Additionally, we remain dedicated to returning capital to shareholders as evidenced by our declared dividend of 18 cents per share. The strength of our balance sheet and our ample liquidity provides us the financial flexibility needed to persevere As we move into the second half of the year, the COVID-19 situation remains fluid, and we anticipate that the pandemic will continue to have a material adverse impact on our business. Going forward, we will continue to monitor the COVID-19 situation and attempt to actively mitigate any future impacts on the business. Although it is impossible to predict when these circumstances will be resolved, we are confident that our ongoing operational improvements and healthy balance sheet position us favorably to emerge from this crisis as a stronger and more efficient company than ever before. In closing, I'd like to thank our employees, customers, suppliers, and shareholders for their ongoing support of Miller Industries. Thank you again for joining us this morning. And operator, please open the line for questions.

Thank you. Ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, ladies and gentlemen on the phone lines, if you have a question, please press the 1 followed by the 4. and our first question is from the line of James Lee with Potrero Capital. Please go ahead. Your line is now open.

Good morning. Could you update us on the status of your supply chain and manufacturing facility issues?

Jim, I'm sorry. Would you repeat that question?

Yeah, could I get an update on your supply chain issues and also the production issues that you talked about earlier related from due to COVID? Are you back to what percent of normal? Are you back to pre-COVID level?

Currently, Jim, most of our major supply chain issues have been solved or somewhat mitigated. We have... have taken steps where we did have problems to find alternative supplies. In regards to our own facilities, due to those issues, in the second quarter, we had some plant closures. They happened at the end of the second quarter, and some of those closures extended into the beginning of the third quarter, but we are now fully operational.

So is it fair to say that you can supply whatever demand you're seeing right now 100%?

We are certainly able to supply to our customer level of demand, yes.

and just follow up on your demand environment. How would you characterize the demand environment right now? Are you seeing demand back to what percent level pre-COVID? If you look at the decline in Q2 in your sales, how much would you attribute that to supply and facility issues versus demand issues?

Well, as we entered Q2, we had a fairly large backlog. That backlog was driven by a very strong market condition from the end users. That backlog as we entered Q2 and there were closures and also stay-at-home orders We gave our distributors an opportunity to look at what they had on order from us to make sure they were not in an oversupply position based on current economic conditions. We continued to build, but we did give them an opportunity to lower or in fact cancel certain orders if they felt uncertain about their customer's desire to take the product. Coming out of the stay-at-home orders, and I apologize, let me back up a little bit. Those stay-at-home orders impacted, in particular, a couple of segments of what we build. particularly in the light duty segments both the carriers and wreckers as we entered into past opening up or the beginning of the economy opening up we started to see a tick up of orders from our distributors and that tick up is still progressing today Although I haven't done the math, I don't know where we are from an order entry level. Will, pre-COVID to now, where are you domestically?

I think over the past four to six weeks, we've seen an increase back in orders from domestic distribution in that 70% range after our backlog shrank substantially. I believe that were building products to meet the customer's demand at the appropriate rate at this time.

Right. But, Jim, I would, I mean, both Will and myself are, Will in particular, are monitoring our distributor inventory levels along with our VP of sales, Vince Tiano, to make sure that they are not putting themselves in a position that may weaken them in the future. On the international side, I would say France is ticking back up and probably are somewhere in the neighborhood of, I wouldn't say 70%, but maybe 60% of pre-COVID in terms of order entry. The U.K., however, is probably at 35%, 40% of pre-COVID. Got it.

So how do you guys think about, I mean, you talk about stay-at-home, what did impact some of your products, you know, with the miles being driven still, I would say probably well below pre-COVID level. How do you think that would impact demand going forward as there's probably less need for tow trucks or less wear and tear on the trucks?

Yes, Will, I believe that certainly, you know, in the domestic and the U.S. market, miles driven certainly affects the end users' demand at our distributor level. Although, as, you know, areas have opened back up, we've seen distribution in those major metropolitan areas start to pick up rapidly as well. I think you're certainly seeing it regionally based. Those regions that are opening back up and people are back out on the road, you're starting to see distribution recover. Certainly in areas in the Northeast, in California, where the closures are or the openings are much slower, there's a lot slower level of travel and distribution is slower to recover.

This is Bill. And at the same time, we also realize that the U.S. auto fleet, as we consider it, is at its oldest age. So that does have some impact. I think it's up to 16 years on average now or something. So we'll see what happens.

You mentioned earlier that you're monitoring your dealer inventory. Could you talk about the health of your dealers and also your end customer being the tow truck owners? Imagine that in this environment, they're probably not doing well. Would there be financial issues, perhaps some bankruptcy issues with either the end customers or the dealers?

No, I believe our distribution network is extremely healthy and strong. Certainly giving them the opportunity to cancel any orders that they felt would be overstocked. Helped not put them in a cash position or a negative cash position. Talking to end users from around the country. Certainly a lot of them took advantage of the PPP money that was afforded to them. and for the most part they seem to be extremely positive and at this time I've not heard of any major fleets and certainly not any of our distributors in a financially negative position. What about the tow truck owners? Have you heard anything? No, the operators as well. I mean, they took advantage of PPP money, and they seem to be all relatively positive for the outlook in the future.

I think you mentioned this earlier, but I missed it. You gave your dealers the flexibility to cancel orders. What have you guys seen on that front on order cancellation?

We gave them a one-week window. to cancel specific orders, things that weren't already in the production window that had not been scheduled. So there was a specific time period of when they canceled the orders and what orders they could cancel. I can't recall off the top of my head exactly how many, but it was probably less than 10% of total orders in our backlog that got canceled at that time. It was, quite frankly, almost insignificant. with the length of our backlog that we had. Our backlog still remains to be extremely healthy.

Yeah, I think the cancellations, as Will said, were probably around 10%. But in the height of the pandemic closures and stay-at-home orders, what was really evident was six or eight weeks of extremely low order entry rates. And we continued to the best of our ability to produce. Although there wasn't a lot of cancellations, we did have a dry spell, what I would call a dry spell in order entry that now, as Will had suggested or told you, we're back to about 70% of pre-COVID levels.

All right. Talk about what percentage of your sales could be come from government orders.

I'm sorry, what was the question? Debbie, do you have that number? Are you talking about new order entry or are you talking about deliveries?

Just revenue, 1%. Just kind of want to get a sense of how much your business is from the government orders and whether the government, those contracts are more stable than the private operators.

The government orders delivered in the second quarter were approximately $9 to $10 million. In terms of order entry, we've seen pushback on a variety of government projects, not canceled, not withdrawn, but pushback in time frame.

Okay. Last question is on CapEx. Notice that you guys are, looks like, incremental 10 million new CapEx for the Tennessee plant. I recall that two to three years ago you guys had elevated CapEx for retooling your plants, and so a little surprised that there's more CapEx. So shortly after, is this something that we should expect that every two to three years you're going to have an elevated CapEx for your plants? Okay.

I'm going to turn that question over to Will. Will, do you want to?

No. Going through the pandemic and looking at production rates and the efficiencies that we had seen from our capital expenditures in the past in both our Pennsylvania facilities and our Chattanooga or Ottawa facility, we had excess capacity from a labor standpoint in our Greenville, Tennessee facility. As we look through the pandemic, we took an opportunity at this time to invest in some state-of-the-art fabrication equipment and we're taking a portion of our Greenville facility and insourcing some of our outsourced fabrication that we currently purchase. to vertically integrate our production process. So it's not something that I would necessarily say every couple of years we're going to do. However, with our balance sheet and debt level being where it is, we felt that it was an opportunity to vertically integrate.

It also, I think, besides vertical integration, the pandemic pointed to the fact that There were some supply chain issues, and some of those issues could be satisfied if, in fact, they were under our own control. So we've made the decision, which is backed by the board, to make those investments in Greenville, not only to enhance our efficiencies, but to protect our market.

Okay. So it sounds like the main benefit you guys are looking for is to help mitigate future supply chain issues by freeing some of the production in-house?

Absolutely.

It would have the ultimate benefit on the gross margin line as well.

Absolutely. Bill? Yeah? I didn't hear your answer. My answer was absolutely. We wouldn't be doing this project if it didn't help on the gross margin line. as well as protect us from the supply chain issue. Got it. Thank you.

Thank you. Thank you, Mr. Lee.

Thank you. Once again as a reminder, it is 1-4 if you have a question. 1-4. And I'm showing no further questions. I'll turn it back to the presenters. Thank you, operator.

Thank you, operator. And thank you again for joining us on the call today. And we look forward to speaking with you again on our third quarter results conference call.