CHICAGO--(BUSINESS WIRE)--Advisory Research, Inc., which owns approximately 3.25% of Miller Industries’ (NYSE: MLR) (“Miller” or the “Company”) outstanding shares, today sent the below letter to the Company’s Board of Directors (the “Board”).
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March 21, 2024
Miller Industries
8503 Hilltop Drive, Suite 100
Ooltewah, TN 37363
Attn: The Board of Directors (the “Board”)
Members of the Board,
Advisory Research, Inc. (together with its affiliates, “Advisory Research” or “we”) is a long-term, top shareholder of Miller Industries (NYSE: MLR) (“Miller” or the “Company”), holding approximately 3.25% of the Company’s outstanding shares.
As the leading manufacturer of vehicle towing and recovery equipment, Miller possesses high-quality assets and extremely valuable commercial relationships in a secularly growing industry. Having been invested since August 2022, we have spent a great deal of time, energy and resources analyzing Miller’s operational and financial performance. This included visiting the Company’s manufacturing facilities, interacting with numerous distributors, customers and employees, and repeatedly engaging with members of the management team and Board on operations and strategy.
Our diligence has led us to conclude that Miller suffers from an excessive public market valuation discount and can substantially improve its per share earnings power. As a result, we are calling on the Board to form an independent committee to conduct a strategic review that will develop a credible long-term plan to be compared to alternative strategies, including a sale of the Company at a meaningful premium to present value. We believe the Company is an attractive target for strategic acquirers in the sector, and that it could fetch a more than 30% premium relative to its current valuation in a transaction.
While we recognize the Board may feel insulated due to the 2023 recovery in supply chain and vehicle deliveries, as well as recent share price appreciation following activist engagement, we have identified specific operational and strategic issues that should be urgently addressed.
KEY OPERATIONAL AND STRATEGIC ISSUES CONTRIBUTING TO MILLER’S EARNINGS UNDERPERFORMANCE AND VALUATION DISCOUNT
Over the past decade, Miller’s sizeable public market discount has persisted and attempts to close the valuation gap have been minimal. Though the Company has recently enjoyed an increase in its share price, Miller still trades at less than 9.5x trailing earnings and roughly 6x trailing EBITDA.1 We believe this low public market valuation is due to Miller’s inadequate corporate governance and Board oversight, as well as an operating margin that lags peers.
As seen below, the Company has underperformed peers across numerous financial metrics:
| Ticker | Company Name | P/E | EV/EBITDA | Gross Margin | EBIT Margin | EBITDA Margin | Net Leverage | ||
2023 |
2024E |
2023 |
2024E |
||||||
| MLR | Miller Industries, Inc. | 9.4x | 8.1x | 6.3x | 5.5x | 13.2% |
6.8% |
8.0% |
0.3x |
| Average | 21.6x | 18.4x | 11.9x | 10.6x | 23.2% |
10.9% |
13.7% |
1.2x |
|
| Median | 20.2x | 16.1x | 10.7x | 9.2x | 24.9% |
11.3% |
13.3% |
0.8x |
|
| ALG | Alamo Group Inc. | 17.9x | 16.9x | 10.7x | 9.9x | 26.8% |
12.6% |
14.6% |
0.7x |
| FSS | Federal Signal Corporation | 31.0x | 26.8x | 18.0x | 15.7x | 26.1% |
13.1% |
16.6% |
0.8x |
| PLOW | Douglas Dynamics, Inc. | 22.6x | 14.6x | 10.7x | 8.2x | 23.6% |
8.1% |
12.0% |
3.0x |
| BLBD | Blue Bird Corporation | 15.0x | 15.2x | 8.4x | 8.6x | 16.0% |
9.9% |
11.4% |
0.4x |
Source: FactSet, Company filings, Advisory Research estimates, as of 3/19/2024.
In our view, there are a few key factors impeding Miller from reaching its full earnings potential and proper public market valuation:
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Manufacturing Performance: The Board lacks directors with hands-on manufacturing experience who would offer fresh perspectives and necessary oversight to improve and evaluate Miller’s manufacturing performance. Based on a peer analysis and on-site reviews of facilities, we believe Miller’s gross margin should be between 15% and 17%, or higher (well above current 13% levels). The Company should strive to close the gap to best-in-class manufacturers with a clear plan to execute.
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Executive Compensation: Significant increases in management compensation have eroded profit growth and fail to align with stakeholders’ interests. We estimate compensation expenses for management and the Board increased from approximately $4.6 million in 2022 to approximately $15 million in 2023.2 Notably, the Board instituted an incentive plan last year for seven senior executives, including Chief Executive Officer William G. Miller, II, with easily achievable performance targets and generous payouts. The Board also determined that Chairman and former Chief Executive Officer William G. Miller was deserving of a $662,500 base salary and a more than $1 million cash bonus. Miller’s executive compensation thresholds and incentives need to be realigned with shareholders, directly linked to the share price performance.
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Sales, General and Administrative (“SG&A”) Expenses: SG&A increased 38% from $53 million in 2022 to $73 million in 2023. Outsized management compensation, hefty legal expenses, sizeable corporate staffing levels and the use of two corporate jets are just a few examples of the Board’s lack of operating discipline and oversight. Even adjusting for the increased management compensation noted previously, SG&A increased by nearly 20% year over year. We believe there is an opportunity to remove $10 million to $15 million of costs on a standalone basis, and an even greater opportunity to remove overhead costs via a strategic transaction.
- Capital Allocation: Miller has not authorized a share repurchase in more than a decade, even when its shares were trading at an even more pronounced discount to intrinsic value. While it was encouraging that the Board recently increased the quarterly dividend by 5.6%, it was the first increase in 53 quarters and delivers a low payout ratio of roughly 15%. A clear capital allocation framework needs to be implemented and articulated to shareholders.
THE BOARD SHOULD INITIATE A STRATEGIC REVIEW TO EXPLORE ALL PATHS TO MAXIMIZING SHAREHOLDER VALUE
We see multiple avenues for Miller to drive significant value for shareholders. This is why we believe a strategic review is essential to develop a credible long-term plan that the Board can compare to alternative strategies, including a sale of the Company. Publicly committing to such an action would give potential buyers and the public market confidence that the Board is laser focused on shareholder value.
To ensure timely execution and a thorough process, we believe the Board must form a committee of independent directors to oversee the strategic review. This committee should be led by Lead Independent Director Theodore H. Ashford III and hire independent financial advisors and legal counsel to ensure a comprehensive, independent process. Setting a standard for expected operating performance for investor assessment and incentive alignment, as well as the consideration of a strategic sale, should be the outcomes of the review.
Our analysis indicates Miller should reasonably be able to achieve a 10% to 12% operating margin and 11% to 13% EBITDA margins, which are still well below other scaled specialty vehicle manufacturers. These within-reach improvements can increase EBITDA from approximately $90 million in 2023 to more than $150 million as the suggested operational improvements are executed.
To be clear, we recognize that a sale is not the only way to maximize the full value of Miller. But with gross margins lagging peers and operating costs hovering at all-time highs, an acquirer would likely pay an attractive price for the Company compared to the value it has been able to achieve on a standalone basis. Miller’s current public market multiple is significantly below public peers and observed specialty vehicle manufacturer private transactions that occurred at 7x-9x EBITDA, as shown below. Transaction multiples imply a price of $60 to $80 per share for Miller at current operating levels and more than $100 per share with execution of the aforementioned operating initiatives.
Date |
Target |
Acquirer |
Transaction
|
EV/EBITDA |
Jan-24 |
Collins Bus Corp |
Forest River |
303 |
8.2x |
Oct-19 |
Morbark LLC |
Alamo Group |
352 |
8.8x |
May-17 |
Truck Bodies & Equipment International |
Federal Signal |
270 |
7.2x |
May-14 |
Specialized Industries |
Alamo Group |
186 |
7.7x |
Source: Company filings, Advisory Research estimates.
We encourage the Board to demonstrate that it is comprised of the right mix of directors by taking definitive action to enhance shareholder value. As you’re aware, earlier this year we made two highly qualified and independent director candidates available for interviews with Mr. Ashford and Nominating and Governance Committee Chair Leigh Walton (among others). The individuals we put forward possess extensive global manufacturing experience in the commercial vehicle market and strategic expertise in transitioning a family-controlled business into a thriving commercial company. It was disappointing that our candidates were rejected outright based on the Committee’s assessment of “fit.” Though we believe they were well-suited to helping address Miller’s operating performance, we want to make clear that we have refrained from formally nominating directors this year so the Board can focus on running the strategic review process.
Over its 35-year history, Miller has grown tremendously from a privately-run tow truck business to a leading manufacturer with equipment in high demand. Our singular goal as a top shareholder is to ensure Miller realizes the full potential of its underlying value. While we appreciate the Company’s engagement to date, it has become clear that our feedback and views are not fully penetrating the boardroom. We continue to believe there are tremendous opportunities for Miller’s Board to capitalize on, and expect to receive a prompt response to the recommendations we have outlined in this letter.
Sincerely,
Matthew K. Swaim |
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Christopher R. Harvey |
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Chairman |
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Managing Director |
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Advisory Research, Inc. |
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Advisory Research, Inc. |
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About Advisory Research
Advisory Research is a 100% employee-owned investment management firm based in Chicago, Illinois. Driven by research and active engagement, the firm offers actively managed U.S. and global equity strategies, serving institutional and intermediary investors through separate account management and private funds.
1 Source: Bloomberg. Miller stock has risen to $47.67 year to date, as of 3/19/2024.
2 Includes salary, bonus, stock awards (at vesting date), bonus pool (cash and stock) and all other compensation.