Calls on the Board to Initiate a Review
Process that Involves Comparing a Credible, Long-Term Plan to
Strategic Alternatives, Including a Sale of the Business
Highlights Operational and Strategic Issues
Contributing to Miller’s Lagging Operating Margins and
Valuation
Sees Opportunity for Miller to Deliver
Substantially More Value for Shareholders by Implementing a Margin
Improvement Plan or Selling to a Well-Capitalized Strategic
Buyer
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”).
***
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:
- 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.
- 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.
- 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 $100 per share
with execution of the aforementioned operating initiatives.
Date
Target
Acquirer
Transaction Value
($mm)
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
Christopher R. Harvey
Chairman
Managing Director
Advisory Research, Inc.
Advisory Research, Inc.
***
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.
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version on businesswire.com: https://www.businesswire.com/news/home/20240321329378/en/
Longacre Square Partners Charlotte Kiaie / Bela Kirpalani,
646-386-0091 advisoryresearch@longacresquare.com
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