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Edited Transcript of MLR earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Miller Industries Inc Earnings Call

Ooltewah Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Miller Industries Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deborah L. Whitmire

Miller Industries, Inc. - Executive VP, CFO & Treasurer

* Jeffrey I. Badgley

Miller Industries, Inc. - Co-CEO

* William G. Miller

Miller Industries, Inc. - Founder & Executive Chairman

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Conference Call Participants

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* James Lee

Potrero Capital Research, LLC - Investment Analyst

* Brendan Dunlap

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Presentation

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Operator [1]

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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.

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Brendan Dunlap, [2]

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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 Madonia, 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.

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [3]

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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 0.1% to $195.5 million versus $195.7 million 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 fourth quarter.

Despite these temporary challenges, we were able to increase gross profits by 1.3% year-over-year to $21.7 million and expand our gross margins 10 basis points year-over-year to 11.1%, which reflects our strong cost control and discipline.

As such, net income was $8.1 million or $0.71 per share compared to net income of $8.7 million or $0.76 per share in the third quarter of 2018. Additionally, during the quarter, we continued to invest in our business by enhancing our software capabilities to better serve our customers, which resulted in a 50 basis point increase in SG&A as a percentage of net sales to 5.3%.

The investments we are making in technology will enable us to increase our administrative efficiency, improve our data analytic capabilities and increase our service levels for our customers. We are currently in the early phases of rolling out this new technology, and I am pleased to announce that the implementation is on schedule.

As we move into the fourth quarter, we remain confident in the underlying strength of our business, both domestic and international, and are committed to providing best-in-class service to our customers while investing for long-term growth.

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 customers and create sustainable value for our shareholders. 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 third quarter financial results. After that, I'll be back with comments about the market environment and some closing remarks. Debbie?

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Deborah L. Whitmire, Miller Industries, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Jeff. Good morning, everyone. Net sales for the third quarter 2019 were $195.5 million versus $195.7 million for the third quarter of 2018, a 0.1% year-over-year increase, driven by -- decrease, I'm sorry, driven by temporary supplier-related delays, as mentioned earlier.

Cost of operations decreased 0.3% to $173.7 million for the third quarter 2019 compared to $174.2 million for the third quarter of 2018 as a result of our continued commitment to increasing production efficiencies. 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 $21.7 million or 11.1% of net sales for the third quarter 2019 compared to $21.5 million or 11% of net sales for the third quarter 2018, reflecting our stringent cost control efforts.

SG&A expenses were $10.5 million for the third quarter 2019 compared to $9.5 million for the third quarter 2018. As a percentage of sales, SG&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 of 2019 was $424,000 compared to $525,000 for the third quarter 2018, which decrease 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 $8.1 million or $0.71 per diluted share. Net income for the third quarter 2018 was $8.7 million 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 first 9 months of 2019 were $615 million compared to $531.7 million in the prior year period, an increase of 15.7%. Gross profit for the 9 months ended September 30, 2019, was $69.6 million or 11.3% of sales compared to $61.1 million or 11.5% of sales for the first 9 months of 2018.

Net income for the first 9 months of 2019 was $27.4 million or $2.41 per diluted share, an increase of 19.5% compared to net income for the first 9 months of 2018 of $22.9 million or $2.01 per diluted share.

Now turning to our balance sheet. Cash and cash equivalents as of September 30, 2019, was $27.5 million compared to $27.2 million as of June 30, 2019, and $27 million at December 31, 2018. Accounts receivable at September 30, 2019, totaled $165.8 million compared to $197.8 million as of June 30, 2019, and $149.1 million at December 31, 2018.

Inventories were $98.1 million as of September 30, 2019, compared to $91 million as of June 30, 2019, and $93.8 million at December 31, 2018. Accounts payable at September 30, 2019, was $114.9 million compared to $129.4 million as of June 30, 2019, and $98.2 million at December 31, 2018.

We reduced our long-term debt by approximately $10 million during the quarter from the prior quarter, bringing the balance to approximately $10 million as of September 30, 2019.

Overall, our balance sheet remains strong, and we 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.

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [5]

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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 first 9 months of 2019, we are extremely pleased with our performance. Specifically, the year-over-year revenue increase during the first 9 months of $83.3 million, along with a gross profit increase of $8.5 million and a $0.40 increase in net income per diluted share. As we move towards year-end and look forward into 2020, we continue to be confident in the strength of our backlog and the underlying positive fundamentals in all our end markets.

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 we will continue to benefit from our strategic capital investments, while we continue to explore future opportunities.

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

With that, we're ready to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from James Lee with Potrero Capital.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [2]

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The supply chain issues regarding chassis, was it -- did it impact domestic? Or is it also international as well?

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [3]

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No, the supply chain issues on revenue were purely domestic.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [4]

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Okay. So I see that domestically that you guys were up 11%. If you didn't have the supply chain issue, what do you think your growth would have been?

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [5]

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We believe that the supply chain issue with the chassis had a 3% to 4% impact on total revenue.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [6]

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Okay. Total revenue, not just domestic?

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [7]

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No, total revenue.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [8]

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Okay. And you said that -- so that's been fixed. So that shouldn't impact Q4, correct?

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [9]

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Yes. We're on the right track in Q4.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [10]

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Okay. So it sounds like there should be some backlog that will get pushed to Q4 because of the supply chain issues. That you should see sort of a greater delivery in Q4 from the delay in Q3.

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [11]

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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.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [12]

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And internationally, is it better -- to read from your press release that you expect international growth to bounce back, to be positive in Q4.

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [13]

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Well, we certainly, due to timing of certain contracts Q3 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. Yes.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [14]

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Okay. And that will normalize this growth, correct? Because I think in the press release, it reads like -- I think you said deliveries -- it said that increased deliveries in fourth quarter. So I'm expecting -- I'm thinking that would...

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [15]

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We will increase deliveries in the fourth quarter over the third quarter, that is for sure. Long-term growth, we have been very successful in military contracts and some foreign contracts 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 or 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.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [16]

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Okay. As you talk to your dealers, have you heard from any dealers that have expressed macro concerns in the U.S. or internationally, and whether that has impacted your dealer inventory?

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [17]

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Our dealers are still reporting strong sales and a busy environment domestically. So I don't know that they've impacted their inventory levels. Our dealers are very good business people. Their inventory -- I have not checked their inventory levels because I have international responsibility. I -- 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.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [18]

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And that's in the U.S., what about internationally? Because I think you guys called out Brexit.

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [19]

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Yes. I don't think Brexit will have any significant impact to Miller Industries in -- overall. Our U.K. subsidiary mainly sells in the U.K. Their customer base is in the U.K. and does very little export business out of the U.K. 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 effect Brexit will have on the customer base. But overall, I don't think it will have a significant impact to Miller Industries.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [20]

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Okay. And I noticed your CapEx -- capital expenditure this year is starting to ramp again. Could you discuss why? Because my understanding is that CapEx was -- should have normalized from the lower level after your plant renovation has completed.

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [21]

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Debbie, I'm going to turn that one up to -- over to you.

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Deborah L. Whitmire, Miller Industries, Inc. - Executive VP, CFO & Treasurer [22]

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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 for data analytics, artificial intelligence, that type of technology. So part of that capital expenditure is to invest in that future technology.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [23]

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What do you think the -- how do you think the CapEx would trend both this year and next year?

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Deborah L. Whitmire, Miller Industries, Inc. - Executive VP, CFO & Treasurer [24]

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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, 3D printing, any of those opportunities that might arise as well as the technology stacks, I think we'll try to take advantage of those opportunities. So I wouldn't be conservative with it because we do like to take advantage of those opportunities when they arise.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [25]

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Right. I mean just what I'm trying to figure out was when should we expect CapEx potentially to trend back towards the level that you guys have seen in the past before the factory -- the expansion?

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Deborah L. Whitmire, Miller Industries, Inc. - Executive VP, CFO & Treasurer [26]

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I would say a good average fee would be $15 million 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 million.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [27]

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And that's the rate we should look forward to over the next few years, not just this year or next?

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [28]

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Well, we certainly hope that's the case. But opportunities do present themselves. And if we're given the opportunity to increase shareholder value 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 yes, that would be the plan.

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William G. Miller, Miller Industries, Inc. - Founder & Executive Chairman [29]

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Yes, Jeffrey -- Jeff -- Jeff and Lee, this is Bill Miller. I think that what 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 current attitude of the distributors, we just introduced a new 100-ton rotator at a special showing of which, what was it, Jeff, 1,500 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 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&D center just for the projects that are on the future and the forefront right now, so that we can continue to get this kind of growth rate looking forward.

So 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 constraint. So yes, we spend a little money, but our return is very large compared to making acquisitions or some other alternative.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [30]

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Got it. So I suppose -- I'm looking at the CapEx level prior to your factory expansion, I think it was in the neighborhood $5 million to $10 million per year before that. So that's not a level that we should be thinking about going forward. It won't be that low.

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William G. Miller, Miller Industries, Inc. - Founder & Executive Chairman [31]

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Well, the only thing I would realize -- Debbie, what is our depreciation rate up to? I seem to remember it's about $18 million.

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Deborah L. Whitmire, Miller Industries, Inc. - Executive VP, CFO & Treasurer [32]

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$12 million.

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William G. Miller, Miller Industries, Inc. - Founder & Executive Chairman [33]

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Yes, $12 million, you got a little bit more. And we historically have tried to at least stay on that kind of a track to continue to replace and build our plant other than this expansion, which was not staying up to snuff but a better idea. And we have an R&D business out there. And you -- as you look at CapEx right now, our R&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.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [34]

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Got it. Assuming -- the last question is on capital allocation. Assuming your -- the demand environment remains strong, and it's not like CapEx is going to be like what it was in -- when you guys were expanding your factory, you should be -- start generating more free cash flow. How do you guys think about return of capital to shareholders via increasing dividend or perhaps stock buyback?

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William G. Miller, Miller Industries, Inc. - Founder & Executive Chairman [35]

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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 period because of the CapEx we're 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.

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James Lee, Potrero Capital Research, LLC - Investment Analyst [36]

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Are there any big capital projects that you see in the horizon that may constrain your return of capital to shareholders?

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William G. Miller, Miller Industries, Inc. - Founder & Executive Chairman [37]

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No. I don't see them. Jeff, do you see any?

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [38]

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No, sir.

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William G. Miller, Miller Industries, Inc. - Founder & Executive Chairman [39]

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Debbie?

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Deborah L. Whitmire, Miller Industries, Inc. - Executive VP, CFO & Treasurer [40]

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No, sir.

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William G. Miller, Miller Industries, Inc. - Founder & Executive Chairman [41]

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Yes, I -- right now, I don't see any that are in front of us that are -- that would have some kind of a restraint like the $50 million we had to spend to be able to jump from $500 million to have capacity to get to 8 9, $100 million when -- whatever we -- whatever the customers demand.

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Operator [42]

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(Operator Instructions) 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. Jack Badgley for any additional or closing remarks.

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Jeffrey I. Badgley, Miller Industries, Inc. - Co-CEO [43]

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We'd like to 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.

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Operator [44]

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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.