Earnings Call: Q3 2019

Nov 7, 2019

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 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 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 are 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 110th of 1% to $195,500,000 versus $195,700,000 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 4th quarter. Despite these temporary challenges, we were able to increase gross profits by 1.3% year over year to 21 point $7,000,000 and expand our gross margins 10 basis points year over year to 11 point As such, net income was $8,100,000 or $0.71 per share compared to net income of $8,700,000 or $0.76 per share in the third quarter of 2018. Additionally, during the to better serve our customers as a percentage of net our administrative efficiency, improve our data analytic capabilities, and increase our service levels for our customer. We are currently in that the implementation to providing best in class service to our customers, while investing 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 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 3rd 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 $195,500,000 versus $195,700,000 for the third quarter of 2018. A 0.1% year over year increase, driven by temporary supplier related delays mentioned earlier. Cost of operations decreased 0.3 percent to $173,700,000 for the third quarter of 2019. Compared to $174,200,000 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 $21,700,000 or 11.1 percent of net sales for the third quarter 2019 compared to $21,500,000 or 11 percent of net sales for the third quarter 2018, reflecting our stringent cost control effort SG and A expenses were $10,500,000 for the third quarter 2019 compared to $9,500,000 for the third quarter 2018. As a percentage of sales, SG and A increased approximately 50 basis points to 5.3% from 4.8% in the 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 of 2018. Which decreased was primarily due to increases in interest income on distributor receivables. Other expense for the third quarter 2019 was 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 $8,100,000 or $0.71 per diluted share. Net income for the third quarter 2018 was $8,700,000, or $0.76 per diluted share. Now, let me briefly review the results for our 9 months ended September 30, 2019. Net sales for the 1st 9 months of 2019 were prior year period, an increase of 15.7 percent. Gross profit for the 9 months ended September 30, 2019 was $69,600,000 or 11.3 percent of sales compared to $61,100,000 or 11.5% of sales for the 1st 9 months of 2018. Net income for the 1st 9 months of 2019 was $27,400,000 or $2.41 per diluted share, an increase of 19.5 percent compared to net income for the 1st 9 months of 2018 of $22,900,000 or $2.01 per diluted share. Now turning to our balance sheet. Cash and cash equivalents as of September 30, 2019 was $27,500,000, compared to $27,200,000 as of June 30, 2019 and $27,000,000 at December 31, 2018. Accounts receivable at September 30, 2019 totaled $165,800,000 compared to $197,800,000 as of June 30, 2019, and $149,100,000 at December 31, 2018. Inventories were $98,100,000 as of September 30, 2019 compared to $91,000,000 as of June 30, 2019, and $93,800,000 at December 31, 2018. Accounts payable at September 30, 2019, was $114,900,000 compared to $129,400,000 as of June 30 2019 $98,200,000 at December 31, 2018. We reduced our long term debt by approximately $10,000,000 during the quarter to approximately 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 dividend of $0.18 per share payable December 16, 2019 to shareholders of record at the close of business on December 9, 2019. Now, I'll turn the call 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 1st 9 months of 2019 We are extremely pleased with our performance. Specifically, the year over year revenue increased during the 1st 9 months of $83,300,000, along with a gross profit increase of $8,500,000 $0.40 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 to underscore our continued commitment to returning shareholder value, we have declared our quarterly dividend of $0.18 per share. Finally, we are confident that while we continue to our customers, suppliers and shareholders for their ongoing support of Miller Industries. With that, we're ready to take your questions. Thank you. Our first question today will come from James Lee with Patrio Capital. Thanks for taking my call. The supply chain issues regarding chassis, was it did it impact domestic or is it also international as well? No, the supply chain issues revenue were surely domestic. Okay. So I see that domestically that you guys roughly above 1%. 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. Okay. And you said that's what that's been fixed. So that shouldn't impact Q4, correct? Yes, we're on the right track in Q4. Okay. So it sounds like there should be some backlog that'll get pushed to Q4. Because of supply chain issue that, you should see sort of a greater delivery in Q4 from the, from the delay in Q3? Yes, 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. Internationally, is it Peter, 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, 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. And that normal high teens growth, correct? Because I think in the press release, it reads like, I think you said delivery just by increasing deliveries in fourth quarter. So I'm expecting We will increase deliveries in the 4th quarter over the third quarter. That is for That is for sure. Long term growth, we have been very successful in military contracts and some foreign contracts with, 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, for 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. And as you talked to your dealers, have you heard from any dealers FX expressed macro concerns, in the U. S. Or Internationally and whether that has impacted their dealer inventory? Our dealers are still reporting strong sales. And a busy environment domestically. Don't know that they've impacted their inventory levels. Our dealers are very good business people. Their inventory. I, 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. Yes, I don't think, Brexit will have any significant impact to Miller Industries in overall. Our UK subsidiary mainly sells in the UK. There are customer bases 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, 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. 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 up 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. Data analytics artificial intelligence, that type of technology. So part of that capital expenditure is to invest in that feature technology. What do you think the, how do you think the CapEx would trend, both this year and next year? No. 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. As we look for opportunities, both on in innovation of our product, and investment in robotics, 3 d printing, any of those opportunities that might rise as well as the technology stacks. I think we'll try to take advantage of those opportunities. So I wouldn't I wouldn't be conservative with it because we do like to take advantage of those opportunities when they arise. I mean, just I'm trying to figure out what is 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 $15,000,000, for the year. But again, as opportunities arise, we may take advantage of those, but a normalized run rate would probably be in the neighborhood of $15,000,000. 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 the case, but opportunities do present themselves. And if we're given the opportunity to increase shareholder I do 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. Yes. Jeff and Lee, this is Bill Miller. I think that what you you have to keep in mind and having been the founder and built the company. All of our growth historically which has averaged over, I think, our internal growth rate has 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, the current attitude of the distributors, we just introduced a new, 100 ton rotator at a special showing of which what was it 1500 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, 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 and D center, just for the projects that are on these on the, the future in the forefront right now so that we can continue to get this kind of growth rate looking forward. So we we have 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 constraints. So, yes, 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 mean, we got a CapEx level prior to your factory expansion. I think it was neighborhood of $5,000,000 to $10,000,000 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 right up to? I seem to remember it's about $12,000,000? Yes, $12,000,000, you got a little bit more. And we historically have tried to please 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 and D business out there, and you And if you look at CapEx right now, our R and D business, that we go out 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. Assuming well, last question is on capital allocation. Assuming your demand environment remains strong and it sounds like CapEx is going to be like what it was in, when guys were expanding a factory. You should start 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 were 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 0 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 in Horizon that may constrain your return of capital to shoulders? No. I don't see them. Jeff, do you see any? No, sir. Deputy? Yes, sir. Right now, I don't see any that are in front of us that, that would, have some kind of already strained like the $50,000,000 we had to spend to be able to jump from $500,000,000 to, have capacity to get to 8, 9 $100,000,000 was whatever we whatever the customer's demand. Got it. Thank you. And with no further questions in the queue, that does conclude today's question and answer session. I would like to turn the call back over to Mr. Jeff Bagley for any additional or closing remarks. We'd like thank you for joining us on our Q3 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.