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spk04: 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 Goudreau of FTI Consulting. Please go ahead, sir.
spk03: 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 Jameson 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.
spk07: Thank you, and good afternoon, everyone. In the second quarter, demand remained strong, but our results continued to reflect the impact of supply chain shortages and inflationary pressures. Sales in the second quarter increased 11.2% to $2,201.5 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 remains 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?
spk00: 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 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 of 2022 was $628,000, up from $340,000 for the second quarter of 2021, primarily related to increases in distributor floor plan financing costs, which flex up and down with revenue, along with an increase in our debt levels. Other income and expense for the second quarter of 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 of 2022 was $3.8 million, or 33 cents per diluted share, compared to net income of $6.5 million, or 57 cents 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 six 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 six months into June 30, 2022, with $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 51 cents per diluted share compared to net income for the first half of 2021 of $9.7 million or 85 cents per diluted share. Decreases of 39.9%
spk01: and 40% respectively.
spk00: 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 31st, 2021. Accounts payable as of June 30th, 2022 was $137.7 million compared to $139.3 million as of March 31st, 2022 and $119 million as of December 31st, 2021. During the quarter, we drew an additional $30 million against our revolving credit facility for working capital needs and we drew in additional $5 million after quarter end as we continued 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 will 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 18 cents per share, payable to 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. Now, I'll turn the call back to Will for some closing remarks.
spk07: 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 as timely a manner as possible. 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 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.
spk04: Thank you. We'll now conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad, a confirmation to indicate that your line is in the question queue. You may press star followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk02: Our first question comes from Arnold Ersiner with Miller Industry. Please go ahead.
spk05: Actually, it's a family office, but thank you for taking my questions. 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 trend? build in credit that should generate significant cash flow as you start getting out more finished product?
spk07: 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.
spk05: Okay, thank you. Can you give us, I know you had a pretty significant capital expenditure building the new facility at the beginning of the year. Can you freshen up your capital expenditures for the balance of the year and what we should expect? Thanks.
spk00: 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 a more historical depreciation level going forward.
spk05: In this call, you didn't mention your labor situation. I can't imagine that it's gotten completely resolved in a short period of time, but perhaps freshen up how your incremental ads and training has gone on the labor side and the kind of efficiencies you're achieving there?
spk07: I believe at the moment in time, we are, at most of our U.S. facilities, we are close to full employment and, you know, meeting the needs of our operations team. There are, you know, as always, there's a turnover in that 30- to 90-day timeframe when new employees onboard and don't make the cut. However, from a training standpoint, I think we are seeing less turnover and we are making changes to our structure inside of our facilities to have a little bit more hands-on look and adding an additional level of supervision to be hands-on with our employees. So I think we'll see that benefit us further. through the remainder of this year and in the future. So today we're doing all right with employees. Certainly the cost of employees in the market today is a little bit higher than it has been. It's a very good market to be looking for a job, but we're doing very well.
spk05: Okay. A couple of questions about your revenue trends. In the quarter, I have two questions. One would be if you can give us some sense of cadence month by month as you're seeing some improvement in the supply chain, and maybe has that continued into July. But equally important for me, in terms of the revenue, could you comment on how much of it is volume growth versus price, and maybe highlight a little bit more about the unfavorable mix that you referred to a couple of times? I know it's a lot of questions, but thank you.
spk06: You want to end this, Deb, or you want me to?
spk00: I wouldn't say we see any trends right now as far as month-to-month activity. It is all dependent on supply chain at this point. And, you know, every day seems to be a new challenge. You know, as Will mentioned, we've increased revenue in all facets of our, or increased inventory in all facets to try and be ready for that supply chain relief when it comes. So, you know, if you've got a crystal ball, please share it with us on the month-to-month at this point.
spk05: You didn't see a meaningful change within Q2 month by month. Is that the correct statement? That's correct. Thank you. Volume versus price.
spk00: Sorry, go ahead.
spk05: No, that was my next question. Thanks.
spk00: Okay. Volume versus price. And I think we disclosed, you know, the increases that we've put into place. And as Will mentioned earlier, those kind of rolled in throughout the second quarter. So, you know, I would say probably 75% of those increases were in the second quarter. So, you know, volume-wise, volume where we were down a little, but the pricing made up the difference. So I would say there's probably a substantial amount of growth in there based on the price increase in the second quarter.
spk05: Okay. So reading in your queue, you highlighted a surcharge that went in April 1st that was 3% to 11% and a price increase that went in in June. I don't know if you disclosed the price increase in June, but The bigger question for me is most of the backlog built up in 2021, I'm guessing the surcharge would impact the backlog that you had in 2021. But are you now at a point where if you take on an order, you're fully recovering your costs? And I guess the other question I'd like to see you speak to is, and I know we don't have a crystal ball, but when should investors expect what I'm going to call normalized margins or anything approaching a five-year average in your business?
spk07: From a pricing standpoint, at this point, every, or I should say every, the vast majority of all products in our backlog is at current pricing. So all of our extending products, Price protection on any of the backlog through our four different price increases and or surcharges that were applied in 2021 and early 22 as of June have taken effect. So not only are new orders at current pricing, the backlog is at current pricing as well. Your question about, you know, margins, I would say that, you know, We believe that the price increases that we've put in place are starting to push us back to a more normalized margin. The product mix in 2019 prior to COVID did have a higher level mix of some military product in it. But as far as commercial product, I'm not going to say that we're 100% back to where we were, but I believe that the pricing that we put in place is pushing us back 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.
spk05: Okay. So Deb mentioned that your volume might have been down slightly in the quarter. I guess my question would be, as I look to the second half of the year, assuming you can start to get the critical components that you've been missing and volume gets – do you expect volume to improve given the backlog you have in the back half of the year, or is it literally completely dependent on your ability to get the supply chain improved?
spk07: 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.
spk05: Are chassis still your biggest problem?
spk07: 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.
spk06: So remote controls and lighting control systems.
spk05: Well, I've asked you a lot of questions, so I'll give others a chance. But thank you very much for responding. Thank you.
spk06: Not a problem. Thank you, sir.
spk04: Thank you. And just a reminder, to ask a question at this time, press star 1 on your telephone keypad.
spk02: We'll pause for a few moments to see if there are any additional questions. Thank you. We have additional questions from Arnold Ersner.
spk04: Please go ahead.
spk05: I just want a quick one on, can you please remind us of the key determinants of management comp? I'm trying to look at your SG&A line, which had a jump in it. And I know you have many different components, but with revenues and with operating income down year over year, you know, are executive bonuses being impacted yet? I'm assuming they're performance driven. I just don't have it right in front of me. If you could give us a reminder of the key factors that drive executive compensation? Thank you.
spk00: 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 pre-tax income. So, yes, certainly, you know, lower pre-tax income will affect management compensation.
spk05: So the increase in SG&A is other factors. Sales commissions are other factors. Is that correct?
spk00: It's administrative staff and employee benefits. It is not related to management comp, if that's your question.
spk02: Yes. Thank you.
spk01: Yep.
spk02: Thank you. There are no further questions at this time.
spk04: I'll hand the floor back to management for closing remarks.
spk07: 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.
spk04: Thank you. All parties may not disconnect. Have a great day.
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