Earnings Call: Q2 2020

Aug 6, 2020

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 the time, I would like to turn the call over to Brendan Dunlop at FTI 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 Medonia, 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 that this morning's conference call, management may make forward looking statements in accordance with 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 Ten 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, everyone. Over the last few months, we have experienced an unprecedented health and economic crisis due to the COVID-nineteen 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 to $128,500,000 versus $222,300,000 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 cost and minimize overall inefficiencies while continuing to meet the needs of our year over year to $17,700,000. However, our gross margin expanded approximately 250 basis point points year over year to 13.8 percent due to favorable product mix and operational adjustments made during the quarter. Net income was $5,800,000 or $0.51 per share compared to net income of 10,700,000 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 as they adjust their inventory to meet customer demand. Further, we continue to invest in technological improvement 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 Thanks, Jeff, and good morning, everyone. Net sales for the second quarter 2020 were $128,500,000, versus $222,000,000 $222,300,000 for the second quarter of 2019. A 42.2% year over year decrease, driven by ongoing impacts from the COVID-nineteen pandemic. Cost of operations decreased 43.8 percent to $110,800,000 for the second quarter of 2020, compared to $197,100,000 for the second quarter of 2019 due to the decline in our top line set Cost of operations as a percentage of net sales declined approximately 250 basis points to 86.2 percent from the prior year period. Gross profit was $17,700,000, or 13.8 percent of net sales second quarter of 2019, reflecting favorable product mix and by minimizing operational inefficiencies as a result of adjusting production schedules eliminating over time. SG and A expenses were $10,100,000 20 compared to $11,000,000 for the second quarter 2019. As a percentage of sales, SG and A increased approximately 290 basis points to 7.8% from 4.9% in the prior year period. Interest expense net for the second quarter of 2020 was $429,000 compared to $721,000 for the second quarter of 2019. As we paid down our credit 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 2020 was $5,800,000 or $0.94 per share. Now, let me briefly review our results for the 6 months ended June 30, 2020. Net sales for the 1st 6 6,000,000 was $36,300,000 or 11.9 percent of sales compared to $47,800,000 or 11.4% of sales for the 1st 6 months of 2019. Net income for the 1st 6 months of 2020 was $11,300,000 or $0.99 per share, a decrease of 41.8% compared to net income for the 1st 6 months of 2019 of $19,300,000 or $1.70 per share. Now, turning to our $37,100,000 compared to $43,100,000 as of March 31, 2020 $26,100,000 of December 31, 2019. Accounts receivable at June 30, 2020 totaled $123,200,000, compared to $168,900,000 as of March 31, 2020 $168,600,000 as of December 31, 2019. Inventories were $90,900,000 as of June 30, 2020 compared 92.6 December 31, 2019. Accounts payable at June 30, 2020 was $59,500,000 compared to 96 $800,000 as of March 31, 2020, and $95,800,000 as of December 31, 2019. As you recall, on our first quarter earnings call, we preemptively drew down $25,000,000 from our existing credit facility to ensure that we had efficient liquidity to weather the COVID-nineteen crisis. During the second quarter, we repaid the $25,000,000 we borrowed during the first quarter, reducing our current credit facility balance to $5,000,000, 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 that its Board of Directors approved our quarterly cash dividend of $0.18 per share, payable September 14, 2020 to 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 while taking precautions to provide shareholders as evidenced by our declared of our balance sheet persevere through these challenging times. As we move into the second half of the year, the COVID 19 situation remains fluid and we anticipate on our business. Going forward, we will continue to monitor 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, suppliers and shareholders for their ongoing supportive Miller Industries. Thank you again for joining us this morning. And operator, please you. You. And our first question is from the line of James Lee with Putrero Capital. Please go ahead. Your line is now open. Could you update us on the status of your supply chain and manufacturing facility issues Jim, I'm sorry. Would you repeat that question? 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 what 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 taken steps where we didn't 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, it extended into the beginning of 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 following the demand environment, how would you characterize the demand environment now? And is it are you seeing demand, back to what percent level of pre COVID maybe perhaps, what if you look at the decline in Q2 in your sales, how much would you attribute that to supply and facility issue versus demand issues? Well, as we enter Q2, we had a fairly large backlog. That backlog was driven by a very strong market condition from there were, closures and also stay at home orders, the 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 records, as we entered into past opening up or the beginning of the economy opening up, we started to see 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. We'll, pre COVID to now, where are you domestically? I think over the past 4 to 6 weeks, we've seen an increase back in orders from domestic distribution. In that 70% range, after our backlog shrank substantially. I believe that we're building products to meet the customer 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. Let 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 UK, however, is probably at 35%, 40% of pre COVID. Got it. And so, yes, So how do you guys think about, I mean, you talked about stay at home, but did impact some of your products, with miles being driven still, I would say, probably well below pre COVID level. How does 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, it's Will. I believe that, certainly in the domestic and the U. S. Market, miles driven certainly affects our the end users demand at our distributor level. Although as 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 roads, you're starting to see distribution recover. Certainly in areas, in the Northeast and California where those closures are or the openings are much slower. There's a lot slower level of travel and distribution is slower to recover. Well, this is Bill. And, at the same time, we also realized that, the U. S. Auto fleet, as we considered, is that it's oldest, it's oldest age. So that does have some impact. I think it's up to 16 years on average. Sell or something. So, we'll see what happens. You mentioned earlier that you're monitoring your dealer inventory, because you talked about the health of your dealer and also your, the end customer being the tow truck owners, imagine that in this environment, they're probably not doing well. Would you have the 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 that they were, would be overstocked, help not them, not put them in a, 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 PP 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 on that side? No, as 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. And you mentioned I think you mentioned this earlier, if I may, 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 1 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 can cancel 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? Yes. The, 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 6 or 8 weeks extremely low order entry rates. And we continue to the best of our ability to produce So, although there wasn't a lot of cancellations, we did have a dry spot, 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. Got it. What about the, you talked about what percentage your sales could become from government orders? I'm sorry. What was the question? I didn't It's just sales company government orders. Debbie, do you have that number? Are you talking about new order entry or are you talking about deliveries? Just revenue, what percentage want to get a sense of how much of your business is from the government orders and whether the government are those contracts are more stable than than the private operators? The government orders delivered in the 2nd quarter. Were approximately, $9,000,000 to $10,000,000. In terms of order entry, We've seen pushback on a variety of government projects not canceled. Not withdrawn, but push back in time frame. Okay. Last question is on CapEx notice that you guys are, looks like incremental 10,000,000 new CapEx for the Tennessee plant I recall that 2 to 3 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 every 2, 3 years, you're going to have an elevated CapEx for, for your plants? I'm going to turn that question over to Will. 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, our 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 in in sourcing 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 would 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, 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. So it sounds like the main benefit you guys are looking for is to help mitigate future supply chain issues by bringing some of the production in house Absolutely. Would there be also be benefit on the gross margin line as well? Absolutely. Bill? Yep. Any answer? 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 as well as protect us from the supply chain Got it. Thank you. Thank you. Showing no further questions. I'll turn it back to the presenters for closing remarks. Thank you, operator. Call. Thanks. Ladies and gentlemen, this concludes today's call. We thank you for your participation and ask that you please disconnect your lines.