Miller Industries, Inc. (NYSE:MLR) Q2 2022 Results Conference Call August 4, 2022 2:00 PM ET
Company Participants
Mike Gaudreau – FTI Consulting
Bill Miller – Chairman
Will Miller – President and CEO
Jeff Badgley – President, International and Military
Debbie Whitmire – EVP and CFO
Frank Madonia – EVP, Secretary and General Counsel
Vince Tiano – Chief Revenue Officer
Jamison Linden – Chief Manufacturing Officer
Conference Call Participants
Arnold Ursaner – Miller Industries
Operator
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 Gaudreau of FTI Consulting. Please go ahead, sir.
Mike Gaudreau
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 Jamison 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.
Will Miller
Thank you, and good afternoon, everyone. In the second quarter, demand remained strong. But our results continue to reflect the impact of supply chain shortages and inflationary pressures. Sales in the second quarter increased 11.2% to $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 remained 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?
Debbie Whitmire
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 of 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, 2 data points that give us great confidence that we are moving toward a more normalized working environment.
Interest expense net for the second quarter 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 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 2022 was $3.8 million or $0.33 per diluted share compared to net income of $6.5 million or $0.57 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 6 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 6 months ended June 30, 2022, was $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 $0.51 per diluted share compared to net income for the first half of 2021 of $9.7 million or $0.85 per diluted share, decreases of 39.9% and 40%, respectively.
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 31, 2021.
Accounts payable as of June 30, 2022, was $137.7 million compared to $139.3 million as of March 31, 2022, and $119 million as of December 31, 2021. During the quarter, we drew an additional $30 million against our revolving credit facility for working capital needs and we drew an additional $5 million after quarter end as we continue 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 we’ll 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 $0.18 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.
Will Miller
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 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 in 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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Arnold Ursaner with Miller Industries.
Arnold Ursaner
Actually, it’s a Family Office, 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 build in credit that should generate significant cash flow as you start getting out more finished product?
Will Miller
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.
Arnold Ursaner
Okay. 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?
Debbie Whitmire
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 levels going forward.
Arnold Ursaner
In this call, you didn’t mention your labor situation. I can imagine that it’s gotten completely resolved in a short period of time, but perhaps freshen up how your incremental adds and training has gone on the labor side and the kind of efficiencies you’re achieving there?
Will Miller
I believe at the moment in time, we are — at most of our U.S. facilities, we are close to full employment and meeting the needs of our operations team. There are — as always, there’s a turnover in that 30- to 90-day time frame 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 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.
Arnold Ursaner
Okay. A couple of questions about your revenue trends. In the quarter — I have 2 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.
Will Miller
You want [indiscernible] or you want me to…
Debbie Whitmire
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 every day seems to be a new challenge. As Will mentioned, we’ve increased revenue in all facets of our — or increased inventory in all facets to try and be ready for those — that supply chain relief when it comes. So if you’ve got a crystal ball, please share it with us on a month-to-month at this point. Volume versus…
Arnold Ursaner
You didn’t see a meaningful change within Q2 month by month. Is that a correct statement?
Debbie Whitmire
That’s correct. Volume versus price — Sorry, go ahead.
Arnold Ursaner
No, that was my next question.
Debbie Whitmire
Okay. Volume versus price, I think we disclosed the increases that we’ve put into place. And as Will mentioned earlier, those kind of rolled in throughout the second quarter. So I would say probably 75% of those increases were in the second quarter. So volume-wise — volume, 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.
Arnold Ursaner
Okay. So reading in your Q, you highlighted a surcharge that went in April 1 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 5-year average in your business?
Will Miller
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 price protection on any of the backlog through our 4 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 margins, I would say that 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. So — 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’ve put in place is pushing us back in that direction.
Arnold Ursaner
Okay.
Will Miller
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.
Arnold Ursaner
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 — would 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?
Will Miller
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.
Arnold Ursaner
Are chassis still your biggest problem?
Will Miller
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. So remote controls and lighting control systems.
Arnold Ursaner
Well, I’ve asked you a lot of questions. So I’ll give others a chance.
Will Miller
Not a problem.
Operator
[Operator Instructions] We have additional questions from Arnold Ursaner.
Arnold Ursaner
Just one 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 — with operating income down year-over-year, our 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?
Debbie Whitmire
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 pretax income. So yes, certainly, lower pretax income will affect management compensation.
Arnold Ursaner
So the increase in SG&A is other factors. Sales commissions or other factors, is that correct?
Debbie Whitmire
It’s administrative staff and employee benefit. It is not related to management comp, if that’s your question.
Arnold Ursaner
Yes.
Operator
There are no further questions at this time. I’ll hand the floor back to management for closing remarks.
Will Miller
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.
Operator
Thank you. All parties may now disconnect. Have a great day.
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