Miller Industries Inc (MLR) 2011 Q1 法說會逐字稿

Hello, this is the Chorus Call operator. Welcome to the Miller Industries first-quarter 2011 results conference call. As a reminder, all participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will an opportunity to ask questions. Please note, this event is being recorded. At this time, I would like to turn the conference over to Alex Tramont of Financial Dynamics. Ms. Tramont, please go ahead.

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 2011 first-quarter results, which were released after 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 begin with formal remarks from management followed by a 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 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 would like to turn the call over to Jeff Badgley. Jeff, please go ahead.

Thank you, and good morning.

Yesterday, we reported significantly stronger results for the 2011 first quarter, driven by a sharp rise in sales volume. Net sales for 2011 first quarter were $108.9 million compared to $72.3 million in the prior year period, an increase of over 50%.

Additionally, our net income increased more than threefold primarily from the sales volume increase. The increase in net sales resulted from the acceleration and completion of the government-related order for a prime contractor, which we announced in November of 2010.

The acceleration of this production was requested by the customer in order to get the recovery units into the field as quickly as possible. By completing this order ahead of the original deadline, we demonstrated our production flexibility, adapting to an accelerated schedule, while producing high-quality products.

We're extremely proud of our entire team and are hopeful that this will lead to future orders of this nature. With this order completed, we returned to the production of our other government-related orders at production rates similar to last year, which we will expect to continue through Q3.

We also saw some further improvements in demand from our domestic business. Orders from our domestic operations are up from last year. We are hopeful these improving domestic demand trends will continue throughout the rest of the year. While our European customers continue to deal with tight credit markets and lingering weaknesses in the economy, we did see some improvement in this market in the first quarter and an increase in order levels over year-ago levels.

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

Thanks, Jeff, and good morning, everyone. As Jeff mentioned, net sales for the first quarter 2011 were $108.9 million, compared to $72.3 million in the 2010 first quarter, up 50.7% year-over-year, primarily reflecting acceleration and completion of the government-related order for a prime contractor, which we announced in November of 2010.

Cost of operations increased by about 41.2% to $88.2 million in the 2011 first quarter compared to $62.5 million in the first quarter 2010, primarily as a result of the sales increase. This all resulted in a gross profit of $20.7 million or 19.0% of net sales in the first quarter of 2011, compared to $9.8 million or 13.6% of net sales in the first quarter of 2010.

The increase in gross margin level was driven primarily by the increase in sales volumes this quarter, as well as our efficiency improvements and a shift in product mix, which included stronger sales of manufactured products and a lower percentage of chassis sales.

SG&A expense increased 25.8% over the prior year to $8.1 million versus $6.5 million in the 2010 first quarter. As a percentage of net sales, however, SG&A decreased to 7.5% from 9.0% over the year-prior period.

Other income related to foreign currency transaction was a negligible loss for the first quarter of 2011 compared to a net loss of $42,000 in the first quarter of 2010.

Total interest expense in the 2011 first quarter was $146,000, compared to $110,000 in the first quarter of 2010, reflecting higher chassis interest costs.

Net income was $7.4 million, or $0.61 per diluted share, compared to $2 million or $0.17 per diluted share for the 2010 first quarter, an increase of 270.7%.

Turning now to our balance sheet, we continue to operate from a position of financial strength. We had cash and cash equivalents of $39.1 million as of March 31, 2011, compared to $46.3 million as of December 31, 2010, and $38.5 million as of March 31, 2010. We did utilize our cash on hand to build out our inventories, as well as to support the working capital levels necessary to successfully meet and complete the deadlines of our new governmental-related contract.

Accounts receivable at March 31, 2011 were $84.4 million compared to $60.1 million as of December 31, 2010 and $52.3 million as of March 31, 2010, reflecting the acceleration of production on our new government-related contract.

Inventories were $53.4 million at March 31, 2011 compared to $39.0 million at December 31, 2010 and $33.7 million at March 31, 2010. Inventories were higher as we purchased inventory ahead for our government-related and our domestic production.

Accounts payable at March 31, 2011 were $50.3 million compared to $34.0 million at December 31, 2010 and $27.1 million at March 31, 2010. During the quarter, the Company did not borrow against its $20 million unsecured revolving credit facility.

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

Thanks, Vince. Overall, we are very pleased with our results for the first quarter and our start to 2011. I am exceptionally pleased with our hard-working, dedicated employees, who put in the long hours to meet the accelerated deadline from our customer.

We have also received positive feedback from the customer regarding our timely execution and high-quality products. We believe our experience on the project can be effectively leveraged into other opportunities as we pursue this type of work in the future.

Looking ahead, we continue to see improvements in demand from our domestic customers and prospects for growth in our European markets. And we expect revenue in the second quarter of 2011 to be somewhat above 2010 levels, but well below our first quarter 2011 level as our government-related work returns to levels seen in previous quarters.

With the recent news about increasing raw material prices, we will continue to carefully monitor the environment for raw material costs and take appropriate actions, as needed. We will also continue to focus on internal initiatives, such as the development of industry-leading products and manufacturing upgrades, while taking the same disciplined financial approach that has continuously positioned the Company for success in all market conditions.

In closing, I would like to thank our employees, our shareholders, suppliers, and customers for their ongoing support of Miller Industries.

And with that, we are ready to take your questions. Thank you.

(Operator Instructions). Rick D'Auteuil, Columbia Management.

Good morning, and great results.

Thanks, Rick.

Thanks, Rick.

So just so we can understand the impact of the military, are you willing to break out what military was in this quarter of the $109 million?

In the footnotes, I mean, there is a reference to how much we had but it's not all just that order. It was 40 -- I'm trying to remember the percentage.

It was 41%.

Yes.

Of government-related work, Rick. It was not all that single order.

Right.

So even though you said this was a priority order and it was going to push other orders out, you ended up doing some other orders in there?

Yes, there's always parts and such. But this, by far, is the majority of that number.

What I'm trying to do is, last year in the second quarter, you did $81 million. You're saying something more similar to that, maybe a little better than that because I would guess your overall demand went up. So are you saying this order accounted for in the quarter maybe $30 million or $28 million?

I would say, yes, you're pretty close, Rick.

Okay. And year over year, I think, we're in better shape. You even said it. Your domestic business has improved demand-wise. Europe is seeing year-over-year improvements, still weak, but -- so I would think it would be disappointing to do something that looks like $81 million in Q2.

I don't know if you're trying to push us down to that level, or you're just saying, hey, don't expect $109 million again. And it's more likely to be something at least 10% better than the year-ago second quarter.

Well, Rick, really, we hope to improve our results from second quarter -- from the $81 million. But we certainly wanted to caution our shareholders that $109 million is unreachable. And we don't want people out there thinking that's going to be a continuous number that we're going to hit.

Did you -- on the order, given that you had to jump through hoops and probably ran overtime and other things that are not optimal, was the order done at average margins or less-than-average margins versus the balance of your business, not versus what you've historically done? I know you had good operating utilization rates, so that would have helped everybody.

I think the efficiency, obviously, increased our margins throughout the quarter because we utilized all our plants. But the pricing of the contract was similar margins to our commercial product.

Okay. Have you had any -- you didn't mention any particular shows or anything you've been to. Just curious if any of those are on the horizon or you had any in the quarter.

We actually had a show subsequent to the quarter in April. It was held in Orlando, Florida. That's arguably the largest, although some people say the second largest in the world. Well-attended show, attendance was up from last year. All the trucks that we took were not brought home. Everything sold through our distributors.

Okay. So it sounds like the environment is pretty healthy actually, right?

I think the environment, after last winter's weather, that show was attended by people throughout the United States, Canada, and Europe. The weather conditions in the Midwest, the Northeast, I think, towers felt a little healthier this year than last year. There obviously was concern at the show regarding fuel cost, because that's a major expense in their operations. So yes, feeling was better but tempered by what's coming up in the future.

And what do the metals prices do on the pass-through? I mean, what does that mean as far as price increases, just to maintain margins?

Well, obviously, I'm sure you follow raw materials. We certainly do. And that has necessitated us taking a very strong look at a price increase and are initiating one currently.

Any forward commitments on key raw materials?

We do not hedge raw materials. Some of our suppliers buy ahead. As Vince mentioned in his discussion about our inventory levels, part of that was a buy-ahead to beat raw material increases from our suppliers and to maintain margins on the government-related contract we went back to that is already priced.

Okay. So you're not exposed on fixed price commitments to customers and variable raw material costs, right?

We do have a backlog. We would never go back to our distributor base and ask for an increase on products that they already have sold. So, yes, there is some of that variability, but I don't think there's too much exposure.

Okay, all right. I appreciate it. Thanks.

No problem.

Gregg Hillman, First Wilshire Securities.

Yes, good morning.

Hey, Gregg.

Yes. Could you talk about something in the area of target capital structure? In particular, Bill, how much money you think you have available to do an acquisition? Or right now, what would you consider that to be in terms of your cash?

Bill, you want to take -- I think that question was directed to you.

Yes. I heard it; I was thinking about it. Basically, we learned in this increasing our volume that we need approximately $20 million to do an up-burn in increases in inventory and receivables as we go along. So we look at $20 million sitting on the sideline to handle our volume kickup. That's kind of normal for us.

As you can see, we probably had $40 million or so. You might say we have $20 million of which at least half of that sits in Europe, in our European subsidiaries. But I expect that as this -- I look at this order like a rabbit going through a boa constrictor. We probably have some additional cash that will show up in the next quarter.

So we have a little money for acquisition, obviously. We haven't done any use of any of our credit lines. And of course, we're out there, but I don't see us in the position to do anything that's not sticking close to our knitting, which is our strategy to stay close to what we're doing. At the same time, we'll probably look at what's best for the shareholders as we go forward.

Okay, is there a stock buyback on right now? By the way, I forget.

Frank, how can we answer that?

No.

Yes, we have a buyback program that was announced in March, I believe it was in '09, that is still in place. But we haven't bought the shares under it.

Okay. And that was how much?

It was a $5 million buyback announcement.

$1 million, okay.

$5 million (multiple speakers) --

Gregg, it was $5 million, not $1 million.

$5 million?

Yes, and I think we are clearly going to be looking at that.

Okay. As a possibility for use of cash. Okay. And --

But we would have to announce again, I think, right, Frank?

Right.

We'd have to make a current announcement that we were now out there, to let people know.

Okay.

Because it's been a while that we didn't do it before, given the condition of the world. But the condition of the world is getting better.

So you have to reannounce your buyback to start it again.

We'd refresh the previous announcement.

Okay, okay. I get that. And Jeff, on the manufacturing side, I think, in the last call you mentioned you developed another -- a capability in another plant that didn't have it before. I don't know, was that to make cranes or (multiple speakers)?

No, no, no. It was just that we're utilizing all our plants on the government-related contracts. Some of those plants -- one of our strengths, obviously, is flexibility throughout a majority of our plants. Ooltewah normally builds heavy-duty wreckers. We built sub-assemblies for our government-related contract in our Greeneville facility, which supplied Chattanooga, which allowed us to hit our delivery targets.

Okay. And Jeff, what ongoing experiments do you have at your plants right now to improve, let's say, efficiency, ergonomics or safety?

Well, we certainly work hard on the safety side. Safety issues --

Regular meetings.

All the time at all our plants. In terms of efficiency, we learned a lot through this last contract period, and we've begin to reorganize our thought process on how we manufacture heavy-duty wreckers.

It was pretty interesting to see the capability of this plant to build historically something we build at a rate of 6 to 8 a week into a level of 25 to 30 a week. And that was done by obviously changing thought processes in the process of building that unit. So we're going to try to emulate some of that.

And are you trying to actively develop new manufacturing skills to do other things, I don't know, to build cranes that will allow you to get into other business segments?

We have the skills to do a lot of different things from a manufacturing standpoint. But I think, really, that's just a small part of the equation because it's the development of standout distribution networks that make you successful in those endeavors. And before we ventured into something outside our knitting I think we'd check how we would approach getting that product to market.

It's just not building a product, it's obviously distributing and selling that product. And I think that's -- if you weld, you can weld a lot of different things. If you engineer, you can engineer a lot of different things. But at the end of the day, you've got to make sure, at least in my mind, that you're aligned with the proper distribution strategy for that product you weld and engineer.

Okay. And then Jeff, what percentage of your time do you spend flying around the world to build new distribution in the Far East and other places?

Yes, I would say I travel a lot, but I've never sat down and said, here's a percentage of my time. Obviously, I know your questions, and I just got back from Germany. How's that?

Okay, good. And then finally, just about, in particular, China, have you found a good partner in China? Or do you think that will happen anytime soon?

Well we've spent some time in China. I find it, in particular, a very hard market to address from a partnership, especially in our industry. There are some requirements in partnering and installing equipment on trucks that make it particularly hard, so we continue to address that market through agents who have sold some units into China while we seek a trustworthy arrangement in China.

Okay, okay. Thanks very much.

Yes, yes.

Walter Lang, Avondale Partners.

Hi, guys. Quick question on supply chain, and it relates to chassis also. Are you seeing any supply chain disruptions on the products you order yourself for the back-end? And then are you seeing your chassis suppliers have supply chain issues?

And one reason I ask is, and this may be seasonal, but your chassis inventory sequentially went from $7.5 million to $16 million, and then you had referenced on the call that you're not tapping your line of credit but your interest costs went up to $146,000. And that's associated with chassis interest cost.

Right.

So how does that work with chassis?

Well, one question at a time, Walter.

Okay.

First off, as far as supply chain, we have not seen -- other than some discussions about what colors are available in chassis because of pigment problems and paint coming out of Japan -- any major supply disruption.

What we have seen -- and that is part of the reason you saw our inventory go up in chassis -- is lead times from time of order to delivery at most OEMs in the US have extended out drastically, which somewhat plays to the less chassis are available, I think, the more beneficial our chassis program becomes to our distributors. So our chassis personnel bought some chassis knowing lead times were stretching out so we could make deliveries to our customers throughout second and third quarter.

As far as chassis interest, I would say through the first quarter, we probably should have paid for some chassis that came due versus let them roll on to that chassis supplier's floor plan program. But we were busy trying to get out a contract on time, and it was taking a lot of -- we just took our eye off the ball. Should have paid them off, but we didn't.

So, and as far as the lead times, is it fairly consistent across all OEMs?

Yes, I would say it's fairly consistent. It's gone from what was in the fourth quarter, 4 to 6 weeks from time of order to time of delivery to 3 to 4 months from date of order to time of delivery.

Wow. That's significant. And is this because the order rates are going up so much or a combination of that in concert with their own internal supply chain issues?

Walter, I think both things come into play. But of course, we're only being told it's because their order rates have gone up significantly.

Sure. Okay. Well, great quarter. I appreciate your time.

Thank you.

Thanks.

Thanks.

Thanks.

(Operator Instructions). Carter Newbold, Rutabaga Capital.

Good morning, guys.

Hey, Carter.

Good morning.

Good morning.

I had a question about gross margins which were outstanding in the quarter and higher than I would have guessed you guys would be able to achieve. I guess given the volume and the pace you were working at, I guess my first question -- maybe it will sound silly, but were you surprised at how well you performed?

And then if we look at the spread on gross margins, between what you did this quarter, and the last time the Company was at this revenue level, back 4 or 5 years ago, you seem to have a higher gross margin profile, about 300 or 400 basis points, is that related to mix? Or does that more reflect all the headway that you've made in the manufacturing base and the efficiency that you guys have?

Both.

So how much of each? I mean, how much is structural and how much is mix? Because the structural piece looks like it might be kind of interesting.

Jeff, do you want to handle that one?

Vince was jumping in.

Vince is going to handle it? All right.

Then I'll follow up after Vince.

We did have a favorable product mix during the quarter because the government-related order was strictly manufactured products and not the lower-margin chassis. So when you look at the percentage, that drives that gross profit number up because you don't have a low-margin chassis you're selling; you're selling something you're getting a more normalized margin on. And that's a big piece of it.

At the same time, with the improvements we made in our production and in our various plants, that's having an impact not only in the margins, but in our ability to deliver on an order like that. That order was extremely challenging, and we are so proud of everybody that was a part of that and got that through. It was pretty impressive to see. So I mean, like Bill said, it's both.

I would say that without the changes that we have made in our manufacturing process and the investments that we made over the past few years, we probably wouldn't have gotten the order we received. And those changes obviously improved our margin capability when we ran at high volumes.

So again, I think it's both. And I haven't run the numbers to look at what the chassis effect, the lower chassis level had on the higher volume. So to answer in specifics, I just can't do that on this call.

Okay. And just thinking about the implications of what you guys just accomplished during the quarter for your total capacity, is it fair to say you're a long way from having to add significant physical plant -- fixed assets to handle the upturn if it stretches out for a while?

I think we're in very good shape. I would not see us having to add any fixed structural assets, whatsoever. Not to say that we're not going to continue to look for ways to improve our process and our efficiencies. But structurally, I think, we're in very, very good shape.

Okay. And then just one more question related to the cash flow cycle. I guess, will we have a better look at what your structural cash position is at the end of the second quarter, when you've collected on the contract? I mean, it looks to me that you're going to reverse some of the usage of cash that you had in the first quarter during the second quarter just as you have a normal collection cycle going on. Is that a fair assumption?

I think that's a reasonable assumption.

All right. Good. Thanks a lot, guys.

Thank you.

Thank you.

Rick D'Auteuil, Columbia Management.

Again, a question regarding the military. So in your note you said you have -- you're going back to the military orders that were put on hold and you expect to have them completed through the third quarter this year. Is there any visibility on future military business beyond that?

And just to go back to the customer that was wowed by your performance, is there an opportunity with that customer that you just finished up in this quarter for future business?

Hey, Jeff.

Yes?

I just want to jump in there and just tell you, you continue this, but that's very proprietary information.

Right. I think we can answer the question without --

Right.

Yes, without disclosing too much. Obviously, we continue to focus efforts on expanding our approach to military business. And obviously, there are tenders that are out currently. Whether or not we'll be successful, I don't know. But we are involved in the bidding process of quite a few things that are going on in the world, that's number 1.

Number 2, we have no visibility, whatsoever, about an add-on order for the order we just completed. We certainly, through the next couple of quarters, will be providing parts for support in theater, and also engineering and training for our products in theater. But as far as a pure add-on order, at this point I have no visibility to that.

Okay. Thanks.

As well as the MR30 order too, Jeff.

Right.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

We'd like to thank you for joining the call, and we look forward to talking to you all at the end of the second quarter. Appreciate you, thank you.

This concludes today's event. Thank you for attending today's presentation. You may disconnect.