Miller Industries Inc (MLR) 2010 Q4 法說會逐字稿

Hello, this is the Course Call operator. Welcome to the Miller Industries fourth quarter 2010 results conference call. (Operator Instruction). After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. At this time, I liked to turn it over to Alexandra Tramont.

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 2010 fourth quarter results, which were released after the close of the market yesterday. With us from management today are Bill Miller, Chairman of the Board; Jeff Badgley, CEO; Vince Mish, CFO; Frank Madonia, General Counsel; Allison Houghton, Director of Finance; and Debbie Whitmire, Corporate Controller.

Today's call will being with formal remarks from management followed by the question-and-answer period.

Please note that in this morning's call, management may make forward-looking statements in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. I would like to call your attention to the risks related to the 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 Commissioner.

With these formalities out of the way, I would like to turn the call over to Jeff Badgley. Jeff, please go ahead.

Thank you and good morning.

Yesterday, we reported stronger results from the 2010 fourth quarter and full-year periods reflecting improvements in our markets and better margin performance. Net sales for 2010 fourth quarter were $79.7 million, compared to $67 million in the prior year period, an increase of 19%.

Our sales growth was driven by our government-related contracts, as well as improvements in demand from our domestic business, and an increase in the level of chassis sales from the third quarter and as compared to a year ago. Our recently announced government-related order for 250 recovery units will be delivered through the spring of 2011. This project is a testament to our product innovation and the flexibility of our production which allows us to meet tight customer deadlines while producing high quality products.

We are extremely proud of our entire team for doing an outstanding job to ensure this order is completed in both a timely and effective manner. Upon completion of this order, we will return to the production of our other government-related orders whose delivery was suspended at our customer's request.

While our domestic business continues to increase, our revenue growth for the fourth quarter was partially offset by weakness in our foreign sales. Our European customers continue to contend with tight credit markets and lingering weaknesses in the economy which lags demand trends in the US.

We also increased our fourth quarter net income by 79% over year ago levels, driven by higher sales volumes combined with the benefits of our investments and our facilities, which have enhanced our operational efficiencies. We continue to operate from a position of financial strength, supported by our healthy balance sheet, strong cash flow, and growing income.

Our business has also benefited from our improving domestic markets and our extensive product offering which we believe will drive our longer term sales growth. Now,

I'll turn the call over to Vince who will review the quarter financial results in greater detail. After that, I'll be back with some comments and then we'll open the line for questions. Vince?

Thanks, Jeff, and good morning, everyone.

As Jeff mentioned, net sales for the fourth quarter of 2010 were $79.7 million or $67 million in the 2009 fourth quarter, up approximately 19% year-over-year. Cost of operations increased by about 17% to $66.6 million in the 2010 fourth quarter, compared to $57 million in the fourth quarter of 2009. This resulted in a gross profit of $13.1 million or 16.4% of net sales in fourth quarter of 2010, compared to $10 million or 14.9% of net sales in the fourth quarter of 2009. The increase in gross margin level was driven by our efficiency improvements and shifts in our product mix.

SG&A expense increased 4.8% over the prior year to $7 million, versus $6.7 million in the 2009 fourth quarter. As a percentage of net sales of (inaudible), however, SG&A decrease from to 8.8% from 10% over the year prior period. Other income-related to foreign currency transaction was a net gain of $56,000 for the fourth quarter of 2010, compared to a net gain of $75,000 in the fourth quarter of 2009.

Total interest expense in the 2010 fourth quarter was $59,000, compared to $89,000 in the fourth quarter of 2009, reflecting lower interest expense on distributor planned financing and decreased interest on chassis purchases. Net income was $3.6 million, or $0.30 per diluted share, compared to $2 million, or $0.17 per diluted sharefor the 2009 fourth quarter, an increase of 79%.

Now, let me briefly review our results for the full year period ended December 31, 2010.

Net sales in 2010 were $306.9 million compared to $237.6 million in the prior year period. Gross profit was $46.3 million or 15.1% of sales, compared to $35.3 million or 14.9% of sales for the full year ended 2009.

For the 2010 year end, the Company reported net income of $11.7 million, or $0.96 per diluted share, compared to net income for the 2009 year end of $6 million, or $0.51 per diluted share.

Turning now to our balance sheet, we continue to strengthen our financial position during the quarter. We had cash and cash equivalents of $46.3 million as of December 31, 2010, compared to $43 million as of September 30, 2010, and $36.2 million at December 31, 2009. Our financial strength allowed us to respond quickly in support of our customer's efforts to secure the government-related contracts we have been announcing.

The accounts receivable at December 31, 2010 were $60.1 million, compared to $61.7 million as of September 30, 2010, and $44.7 million at December 31, 2009. Inventories were $39 million at December 31, 2010, compared to $29.8 million at September 30, 2010, and $36.1 million at December 31, 2009.

Accounts payable at December 31, 2010, were $34 million, compared to $28.3 million at September 30, 2010, and $19.1 million at December 31, 2009. During the quarter, the Company did not borrow against its $20 million unsecured revolving credit facility.

Now, I will turn the call back to Jeff for further remarks.

Thanks, Vince. Overall, we were quite pleased with our performance in 2010, and believe we begin 2011 in a strong position. For the full year 2010, we nearly doubled our net income. While this was attributable to higher net sales, we also benefited from our ability to improve operational efficiencies by reinvesting in our business and upgrading our facilities.

Looking ahead into 2011, we will continue to use our cash to reinvest in our business as it makes us better able to meet our customers' needs more efficiently, and ultimately creating more value for our shareholders . Additionally, with the recent news about raw material pricing, we will continue to carefully monitor the environment for raw material costs and take appropriate actions, if needed.

We expect work on our 250 recovery unit order to drive results for the first half of 2011, with most deliveries occurring in the first quarter. We have brought in temporary workers and extended overtime to accelerate our production schedule and meet the required deadlines.

As a reminder, in order to focus on this order, we have delayed work on some of our other government add-on orders until this DX priority order is complete. We expect to resume delivery of our other orders during the second quarter.

Our experience to effectively deliver large government-related contracts has continued to grow, making this a significant contributor to our business. We will continue to aggressively pursue this type of work going forward. Although there are no guarantees, we will be successful in these efforts.

Looking ahead, we remain cautiously optimistic regarding our long-term market conditions. While we are focused on the recovery unit order into the spring of 2011, our previous government add-on order, combined with what we expect to be improving demand levels, should result in another successful year for the Company.

In 2011, we will continue to develop industry-leading products and take the same disciplined financial approach to managing our business that has benefited us to date. We firmly believe that these actions will lead to long-term sales and earning growth for our Company.

In closing, I'd like to thank our employees, our shareholders, suppliers, and customers for their on-going support of Miller Industries. With that, we're ready to take your questions. Thank you.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And the first question comes from Greg Hillman from First Wilshire Securities Management

Good morning, gentlemen.

Good morning, Greg.

Hi. Could you, Jeff, could you talk about your government business, how it's changed over the last like 20 years?

Well, I can give you a quick synopsis. Over the last 20 years, if you started at 20 years in the beginning, there were very few government orders. It progressed into applying commercial products to municipalities in the US, and then grew to applying commercial products to municipalities on a worldwide basis. Finally, we were successful in some GSA contracts and then moved into, the last three or four years, into supplying -- excuse me, we did a data path, military-related contract, supplying some specialty products that are different than our commercial products, then we grew into a position of supplying where we are today.

Okay. And are you going to -- and just a couple of follow-up on the government -- doesn't New York have a big like order every once in a while or a big state? Is that coming up any time soon?

They normally buy, I believe, on a cycle of five years. And yes, if there are funds available, and I'm not sure there are funds available in New York, I would say probably within another year we will see a tender release from the City of New York.

And are there any big other government orders that have -- you know the published ROTs that's publicly available that you can talk about that you're going to bid on?

We are working not only in the US, but worldwide on several opportunities. But given the nature of those opportunities, I don't really want to disclose where they are.

Okay. Outside of the United States, is that for municipalities or is that for militaries outside the United States, too?

Well, again, I don't won't to point anybody in the right direction, so --

Okay.

Thank you. (Operator Instructions). And the next question comes from Rick Doty from Columbia Management.

Good morning.

Good morning, Rick.

Good morning. So on -- and you may have addressed this, I apologize if I missed it, but the chassis issue that was in last quarter, what is the status of that? Is that resolved at this point? Are there any constraints regarding the supplier?

No, actually, chassis manufacturers resolved their issues with the new engine. Chassis started flowing. I think if you look today versus four or five months ago, which should help our chassis business because we attempt to order what we believe demand levels will be for our distributors, lead times for chassis manufacturers have extended dramatically.

Does -- was there any catch-up in this quarter from the missed volume last quarter or that wasn't the case?

Well, I mean, as I said in my comments, chassis sales were up from third quarter. Rick, I really don't have the information in front of me to say some of that was catch-up from the third or some of that was just improved demand levels in the fourth. I'm sure some of it was catch-up, but to give you a percentage, I'd be guessing.

Okay. So I guess just to be clear, we didn't lose sales because the chassis issue was across the industry and it wasn't that they could go elsewhere to --

That's correct.

Okay, okay. And then the raw materialissue, is that mostly steel? What else is on your radar screen?

Well, I mean, steel certainly is the big issue. But, obviously, we provide wiring, which includes copper, other metals. Aluminum, at this point, hasn't hit our radar screen because our supplier has done a very, very good job in buying ahead. And, of course, finally, that petroleum cost today tends to cause a little alarm because that will have an effect on all raw materials.

So are you protected on the military work as it relates -- I don't know if you sort of forward buy or get forward commitments to the steel for those orders or there's asteel pass-through component. Can you talk about --

Any orders for the military we have in-house, purchase orders have already been cut. Obviously, if you look, inventory from third quarter to fourth quarter,it was up about $10 million. Obviously, some of that increase was leaning forward to protect and to meet customer deadlines. So from a costing of military, I think we're in pretty good shape.

Okay. All right, I appreciate that. Thank you.

No problem.

Thank you. And the next question comes from Walter Lang from Avondale Partners.

Hi, guys. Good quarter. Can you comment on just the pace, just going off of Rick's questions, the pace of orders on domestic commercial? If I recall, it had been somewhat erratic up until maybe the late September through late October timeframe, and you started experiencing some more consistency in the order patent domestically, and just if that's continuing through the present time. And then secondarily, could you address any changes in responsibilities with Bill, Jeff based upon the release that at least the titles are changing somewhat?

Sure, this is Jeff, I'll take the first question. We have seen a firming of the picked up demand levels on the commercial side of the business. I don't really want to go into percentages because we do have competitors in the market. But I will say we have seen a firming of increased demand levels. Now, I want to make it clear that we are concerned about the price of oil, which ultimately affects the cash flow of our end-user. Okay? How that shakes out, I don't know. It really depends on the longevity and the overall price of the oil situation. With that, I'll turn it over to Bill, and if you have any follow-up questions for me, feel free.

Thank you. I appreciate it.

Walter, this is Bill. How you doing?

I'm doing great. How are you doing?

Great. Your question about our long-term succession planning. First of all, the Board has been working on long-term succession planning and, as you know, you know most all the employees in the company, certainly all the executives, and we have got a full backup chart for almost every manager in the Company at this point. As we look forward in the Board meetings, we determined that we needed to make some expansion of the opportunities to grow for who we believe to be Jeff and I's long-term replacement. Jeff isn't going anywhere for the next 10 years, and neither am I, but you know this business well enough to know it takes 10 years to learn these job. So as part of that, we are expanding responsibilities of people as we grow them, so we needed to make some space and moved, you know, both Vince and Will, we moved them up and they will have some expanded responsibilities as they grow into their positions over time, with Jeff doing the mentoring, and the Board requiring semi-annual reviews on people, of all the officers, so that we can continue to grow our new people. And, as you know, this is a very unusual business, and it's very difficult to go outside for somebody, and it takes a long time to grow within our culture. So we're continuing to work on succession planning long-term.

Great. I appreciate it, Bill. Congratulations.

Thank you.

Thanks you. And the next question comes from Carter Newbold from Rutabaga Capital.

Good morning, guys.

Hey, Carter. How are you?

Good, thanks. I wonder if you could just talk through what you think is happening in Europe, the disconnect between the Europeans and North America markets has gotten kind of long in the tooth. I don't know if that's happened historically, but what -- are you seeing any signs of recovery there, and if not, what do you think is going on?

Carter, I would say I really don't know what's going on in Europe, other than it seems to be harder for the end-user to get good credit to buy our product over the last year or so. I would happily tell you today that order entry rates in the last half of the fourth quarter and the first part of the first quarter have picked up. We hope that continues.

Okay. And looking at the domestic channel, I don't think you guys have ever given any numbers, and I don't know if you have them, but do you get a sense that there's much order activity to build inventory among your key customers or are they just responding to increased in market demand?

I think they are responding to increased market demand, but our distributors are -- a lot of them are third generation, a lot of them have been in the business a long time, and as they see increased market demand, there is a tendency for them to increase inventory levels to allow for quick deliveries so they don't miss any orders.

Okay.

A little bit of both.

Good. And I'm sorry, I've just forgotten, but back to the question about raw materials, can you talk about how pricing works in the industry, do you guys tend to take pricing when you need it quietly and sort of customer-by-customer or is it on a once or twice a year basis that you reset list price or how does that work?

It's not customer-by-customer. It is a general overall price increase which goes out to all our distributors, both domestically and worldwide.

And when was the last time you took a significant price action?

Probably -- I'm going by memory, but I would say probably 2 1/2, 3 years ago.

Okay. Thank you.

Thank you.

Thank you. And our last question today is a follow-up from Greg Hillman from First Wilshire securities.

Hi. First of all, Vince, the last time you had a significant raw material increase when was that and what did that do to gross margins at that time?

Well, the one that was probably the most significant was back in 2004, and we had a fairly big backlog and steel prices went up a few times during the year. We ended up raising prices, but again, we honored the pricing that was in the system, and were able to catch that up. But, you know, the margins did fall there for a little bit.

Okay. So that would be a period to refer to. And, Bill, I just had a question for you -- well, just kind of strategy for the Company, and I wanted to ask you about, number one, the opportunities that you have to reinvest cash flow in the next two to three year. And also, whether you have any -- what you consider to be emerging businesses within your Company as opposed to like core businesses? And then I had a follow-up on that.

Is that my question?

I don't know -- That's what he said.

It was for Bill.

Actually, we have at least three strategic initiatives that we are working on that we think will -- assuming we can get all the way to the end, would have an impact. All of them are closely related to our business, but they are all very important. And they would use some of our cash reserves. When you look at our cash, you might want to consider the fact that when the orders come back, it takes quite a bit of cash to fund this operation at its higher level. So there are several significant things we are working on, on our long-range strategies and the issues we're under right now, but we have to do a lot more work on them.

Okay.

As far as reinvesting in our operations, we're going to continue that. This contract, which by the way from point of purchase order to units delivering in Afghanistan, the period was 90 days.

That's a new record.

So what that taught us was in some situations that we have -- I mean, we have to increase our flexibility company-wide and that to fulfill contracts like this, our other plants in the US, they assisted this time, but we need to invest money in those facilities to increase their flexibility. So if the opportunities arise in the future, and we believe they will, we can continue to meet on-time delivery requirements, which I think reflects very nicely to the customers we're serving in that area. So we will need to reinvest some cash into other facilities.

Okay. When you say increase flexibility, what do you mean by that?

Well, for instance, this contract -- prior to this contract, in the commercial world, we were building approximately 1 1/2 to 2 rotators a day. This contract requires a building of -- I'm sorry, 1 1/2 to 2 rotators a week. I apologize. This contract requires the building of five rotators a day to meet delivery requirements. What that forced us to do was spread out the work from our facility in Ooltewah, Tennessee into other facilities in our system.

And what we found was we had to do some subcontract work at those facilities because their plant, plantfixtures and capacity and process wasn't in accordance to what we needed to do to meet the requirements of the contract. Next time this comes around, we don't want to have to do that. So it's been a great learning experience for the Company.

And then, Bill, what would you say the core competencies are of Miller Industries? The things that you do best.

Well, we have a thing that we talk to, and it's kind of the way that we think about our business, we build the best products in the industry. And I don't say that as a line. We go to 20 shows at least a year, and 10,000 customers are there and they come in and they tell us looking at all products available on the field, the battle as I call it, that we are by far the best product. So, we have learned to develop, design, and innovate the best products.

More importantly, we have the best people in the industry. And I don't say that. Everybody knows it. We were hand picked as long as 20 years ago, most of them have grown within the organization. We are adding a lot of new blood, so we have some outstanding people. All of which have tremendous experience and relationships in this business.

Finally, we have the best distribution in the world, bar none. And I would just tell you if you have the best people and the best products and the best distribution that's a juggernaut that's very difficult to attack.

That's impressive. And speaking of distribution, have you made any more in-roads into Asia or eastern Europe in terms of distribution?

Not in Asia, particularly, and not Eastern Europe, but we have made in-roads into Europe. We have added some distribution in Europe.

Okay. In Germany?

We have increased our sales into and through Germany. To say we have increased distribution at this point, I think rather we would say that we've got our current distribution focused a little more.

Okay. That sounds good. I take it the world demand for your products, I don't know if you've done the market research, but I take it it's much bigger than the current size of your company, is that correct?

Yes. Yes.

Okay. And have you been up able to nail that down anywhere -- what the market size is worldwide for your products?

You know, that would be really kind of -- number one, it would be gut because there is no actual data. That would be number one. And I don't like to talk in terms of gut. And number two, I truly think that's because we have spent a little bit of money internally trying to derive what we think it is and where it is , I just as soon keep that within the Company.

Okay. Great. I appreciate your comments.

No problem. Thank you.

Thank you. As there are no more questions, I would like to turn the call back over to management for any closing remarks.

This is Jeff, and I'd like to thank you for joining our conference call and thank you for the questions. We appreciate your support and we look forward to talking to you very soon about first quarter results. See you then. Bye.

Thank you. This concludes today's events. You may now disconnect your phone lines. Thank you for participating.