Q1 2020 Earnings Call
Greetings and welcome to the L., if I industries fiscal first quarter 2020 results conference call.
Hi, I'm all participants are they listen only mode.
That's a session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
Now my pleasure to introduce your host Jim Khalis Chief Financial Officer. Thank you Sir you may begin.
Good morning, everyone. We issued a press release before the market opened this morning detailing our fiscal first quarter results.
In conjunction with the release, we also posted a conference call presentation in the Investor Relations portion of our corporate website at www outside Dash industries Dot com.
Information contained in this presentation will be referenced throughout today's conference call.
I would like to remind you that management's commentary and the responses to questions on todays conference call May include forward looking statements about our business outlook.
Such statements involve risks and opportunities that actual results could differ materially.
I refer you to our Safe Harbor statement, which appears in this mornings press release as well as our most recent 10-K and 10-Q.
Today's call will begin with remark summarizing our fiscal first quarter results at the conclusion of these prepared remarks, well open the line for questions.
With that I'll turn the call over to Jim Clark.
Jim. Thank you good morning, everyone. This week marks my one year anniversary with LSR.
As I look back I can see the effects of the changes we've made throughout the last year and I'm encouraged there was a cultural shift occurring and steady progress is being made.
This quarter demonstrates to our employees our agents are partners and customers and investors. The dollar size best days are ahead of us.
Looking at results for Q1 fiscal year 2020 reported sales of 88.7 million. This represents an increase or for present over our prior year, but more importantly, these results were a strong indicator that the changes, we're making in our sales process and sales organization.
The potential for the future.
Continuing with comments on our commercial effort I'm happy to say, we have now filled all our regional sales positions and we are one step closer to filling our head of sales position.
As I mentioned in previous calls we've been working hard to build out our sales team and increase our customer contact over the last year.
Simply put the work around our sales team is bearing fruit.
However, we are aware, we still have a ways to go.
In October unless I attended the petroleum equipment Institute P. R and the National Association of convenience stores next annual trade show in Atlanta, Georgia.
This is their industry's largest trade show in North America, and the pace of activity is high.
I had the opportunity to meet talk with a number of our petroleum oriented Whiting and graphics customers.
We had very constructive in positive conversations and all indications are that we should continue to see growth in this segment.
You may see in a press release from US last month as we celebrated our 500 petro oriented install in Mexico.
We have good momentum in this segment and we expect more.
On the road I also had the opportunity to visit with several of our independent niche oriented agents. These are folks that are on the front lines or vertical sales effort and they openly shared their frustrations, they're open projects and suggestions on what we can do better.
There is opportunity here and we'll be meeting with them again over the next few months to increase the strength of our connection.
They present, a strong competitive advantage and we'll continue to work closely with them.
Also go back to October I had to visit the opportunity to visit with one of our larger grocery farmer customers.
We've been working with this customer for decades for projects. It slowed over the last few years and worked it was available was being split between multiple suppliers.
They shared that they're planning some big up teach over the next year and if things stay consistent with the direction of our conversation we should see a market increase in this segment in calendar year 2020.
Actions always speak louder than words, but I felt encouraged coming out of our meeting.
Lastly, regarding our commercial effort I Wanna mention that we had very positive momentum in our outdoor lighting segment last quarter.
We remain in will stay committed to bring a full lighting solution to our customers, including our complete suite of indoor products, but outdoor sales do give us a competitive advantage and differentiate us as a manufacturer.
Let me switch and comment on product development in engineering.
Last month, we held an offsite meeting focused around innovation.
It include members from engineering marketing product management and sales team and was focused on our short mid and long term plans.
The goal was to think inside the box embracing a constrained look at where our greatest opportunities may lie right now.
I'm pleased to say it was very productive meeting and we added another tool and process to our list the possibilities.
The team took a different angles of attack thinking about everything from performance based product improvements to skew rationalization cost out initiatives and new products.
More to say about this in the future, but I'm happy to report they were on the front end of a steady stream of innovation incremental product improvements and broader solutions, which are tied into specific vertical markets.
On the operations from our team has several continue initiatives focused on quality lean processes and on time delivery.
One other projects I'm. Most excited by is a full view study they'd be conducting over the last two months looking at the lifecycle of an order from initial quote to order entry scheduling and commitment parts availability manufacturing shipping and final installation by the customer.
Full view is being documentary and shared so that it can be study end to end with the goal is increasing and understanding what happens when.
Who is involved and how problems can be in part avoided.
We've already discovered a lot and we're confident there there are several areas for improvement all within our grasp and with the goal of providing better customer service reduced errors and lower cost.
A couple of other notes the closing of the new Windsor location was completed in August and the proceeds received.
I'm happy to say this project along with good cash flow and balance sheet management has reduced outstanding net debt by almost 50% in the last year to 21 point Sixmillion and our net debt to adjusted EBITDA ratio stands at 1.7.
This is important because it gives us plenty of dry powder and financial flexibility to be opportunistic and as our overall operation and organizational maturity continues to improve the scope of what's possible continues to expand.
We're continuing our evaluation set of options related to our north Canning facility.
But our goal is a footprint reduction of 70% or more.
This is an effective changes in technology and project work produced in North <unk>.
We simply do not need this space. We currently have and this is a great opportunity to improve our overall operations, while reducing cost I'll have more to share in next quarter.
Looking forward the lighting Robert market remains volatile and I expect those conditions will continue through our fiscal second quarter.
I also believe that during this period of transition LS I remains are proven stable source for innovation high performance Whiting and graphic solutions with export support and service.
We still have work to do but our first quarter results prove that with the REIT focused planning and execution, we can profitably grow our business.
With that I'll turn it back over to Jim Gliese for a deeper look at our financials.
Thank you Jim.
We start by briefly summarizing key financial statistics.
Total first quarter sales to increased 4% to 88.7 million with both the lighting and graphic segments generating gross.
Net income was 4.5 million.
Earnings per diluted share were 17 cents.
EBITDA was 9.2 million.
That's published first quarter results include a 4.8 million pre tax gain on sale, resulting from the sale the new Windsor facility as well as restructuring charges of 200000.
On a non-GAAP basis, adjusted net income was 1 million adjusted he P. S. Four cents per share and adjusted EBITDA 4.7 million.
Complete reconciliation of first quarter GAAP and non-GAAP result is contained in our press release and 10-Q.
The business generate over 18 million of free cash flow in Q1, including 6.4 million in cash flow from operations over 12 million in proceeds from the facility sale with approximately 400000 and capital expenditures.
Working capital decreased 10 million or 14% from prior year with improvements realized in both dollars and days of working capital.
Inventory as a component of working capital decreased 13%, reflecting the result of manufacturing and sourcing process improvements being implemented.
Net debt outstanding has there been reduced over 20 million or 49% over the last 12 months as Jim mentioned net debt now stands at 21 point Sixmillion with a debt to adjusted EBITDA leverage ratio of 1.7.
A regular cash dividend a five cents per share was declared payable on November 26 for shareholders of record on November 18th.
Next I'll briefly comment on performance of our two reportable segments, starting with lighting sales of 63 million was 3% above last year.
Outdoor product sales were particularly strong increasing 12% with gross achieved and target verticals, including retail parking automotive petroleum and C store.
Lighting adjusted gross margin improved 140 basis points to 27.6%.
Several items contributed to the improved margin rate, including price, where we continue to realize several points of the price increase.
A favorable mix of vertical market applications and the initial cost savings from the new wins or closure.
Adjusted operating income of 4.5 million increased 11% on a comparable basis, excluding the onetime favorable adjustment included in prior year results.
First quarter lighting, adjusted EBITDA was 6.3 million or 10% of sales.
Shifting to graphics graphic sales growth continued in the first quarter, increasing 8% growth.
Growth was driven by multiple verticals, including petroleum QSR and grocery.
Momentum remains strong for the petroleum graphics segment with a significant backlog of development work for potential customer programs.
Graphics segment operating income improved sequentially from Q4, but was below prior year.
Income was impacted by the mix of new in early stage petroleum projects.
Improved inventory levels and the impact of lower absorption.
And development work for potential future projects.
Graphics, adjusted EBITDA was 4.7 million or 5% to sales.
I'll now return the call back to the moderator.
Thank you at this time, we will be conducting the question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. The confirmation timely indicate that your line is on the question Q.
You May press Star table, if he would like to your move your question from the Q.
For participants you said speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith One moment. Please let me pull for questions.
Thank you. Our first question comes from Craig Irwin with Roth Capital Partners. Please proceed with your question.
Good morning, and thanks for taking my questions.
So graphics on seem to outperform quite nicely in the quarter, we talked previously about the segment being flattish this year.
I'm really on the on the headwinds you're seeing on certain customers go into digital signage.
Can you talk a little bit more about what gave us the 8.4% growth in the quarter.
Well I know, there's always you know pluses and minuses in there did we have less of an impact from the digital signage this quarter.
Is the the outlook for both in this business, possibly improving for this year.
Hi, Good morning, Craig Jim Clark here, and thanks for joining in Oh, and the graphic side, we've talked about it a few times, but there's there's kind of three pieces to graphics. If you think about it or petroleum graphics are petroleum related graphics are what we call branded graphics and then our digital graphics.
You know petroleum.
We've been in you know a number of early stage large projects.
And.
Then those continue.
On the you know on the branded graphics, if you will from our print standpoint.
We were up almost double digit but on the digital we were up a strong double digit do you know it there like you said, there's some puts and takes a mixes but.
You know all all three of them remain pretty strong.
And I mentioned in my comments, just a few minutes ago that I just came back from the PE either petroleum CWIP in Institute.
Trade show and next trade show, which are very large trade show I had the opportunity to meet with a number of our petroleum customers and I tell you a the at least from what they're saying to us their commitment to can do you continue to kind of refresh and reimage their locations and the work that we've been doing in their satisfaction.
Levels very high.
So I I got to tell you I came away.
From the performance this quarter in the meetings I've been to including one of our large.
Grocery farmer customers, a very encouraged to build for the remainder of the year and until next year I'm bullish.
That's good to hear that's good to hear.
So that's one thing that kind of surprised me in your results as the the free cash flow take out new wins are right. The facility sale in the quarter 6 million Bucks sources. Your net income of four and a half she are continuing to squeeze the balance sheet.
Even in a quarter, where you're actually getting facility, that's not a common or not a common thing to see.
Can you maybe describe for us what works in the quarter and if there is an opportunity now to continue that maybe squeezed the balance sheet for a little bit more cash.
Well I mean as you just brought up it was a you know I think a pretty good accomplishment by the team to be able to generate that cash in the midst of those other changes. So I'm certainly not saying there is room for us to do more I mentioned, the north can't facility longer project. It may not materialize for a quarter or.
Three but theres still some things for us to do from an operation standpoint.
But I wouldn't expect to see the kind of.
You know movement. It we've been able to make a in the last couple of quarters. I think there was some low hanging fruit there that we were able to go after maybe not everybody saw it but I.
I think the team we were able to get to it.
You know is isn't making that comment I also want to say that we've got a few other things were looking at so.
No I don't want to commit to anything right now, but I will say that you know continue a good operational cadence and look for those opportunities.
That's good to hear that's good to hear.
So.
Looks like the business is pretty well stabilized strike here I mean.
We're looking for some gentle improvement this year and hopefully the environment stays accommodative.
But can you talk about sort of whats next up for you on the operational side.
It looks like your your heavy lifting <unk> for the pace.
It's been executed is essentially done.
Is that focus now on margins or gross.
Or potential other avenues to enhance shareholder returns.
Well I think you to combination of pulling all of those levers Craig and I will say that you know just to just in answer to the question. We just had I think there's still some room for us operationally and we'll execute against that now continue to keep you know the whole investment community informed of that I've always said since the guy.
Right here and you know again, when I say I speak of us as a team.
We have some commercial opportunities here and I think that you use the right word you know kind of stability right now I think we've got a good platform to operate off of now.
And our focus is going to be on the commercial side. It has been we've been putting a lot of time in commercially I mentioned that we filled out the sales team, but I think we can I think we can move faster now commercially and I'm excited about that that possibility. It takes a while offer new sales talent.
To get in the group and and learn our customers and our products and you know a rhythm of the company but.
A lot of our effort is going to be.
On the commercial side now and.
That is not just topline, that's obviously margin and I want to add one last comment in respect to that I've talked about you know.
Where we want to focus short time, we do have a very robust indoor product line I will continue to invest in that and we'll continue to have it available. So we will have great indoor product solutions, but I think we really differentiate ourselves on the outdoor LSAG synonymous with that they've got a great reputation and outdoor performance in outdoor products.
And I want to see us be leading with the outdoor.
You know as a general rule and I think that you'll see that occur over calendar year 2020, because were two months away from here from moving into 20 2020, but over the next year, you'll continue to see those improvements and I will be we will be trading off some quality lower qual.
I'd business for some higher quality business and sometimes when that happens you're going to have a little headwind on maybe on the topline, but I'm not suggesting we're going to top line headwind I'm, just saying that when you trade off that business, sometimes you're making a decision to.
You know, except some volume for some higher quality of earnings.
So your comment about outdoors interesting given that the leader and outdoor is in process are being bought by.
Competitive I think being sold by the conglomerate and bought by another large lighting company.
Do you see any specific opportunities that you can outline for us on this call many years ago LSW tires targeting the.
All the orphaned distributors from some Juno win.
Acuity solid Juneau lot of those distributors about fired and that was a great opportunity for out for outside of gone scoop up some revenue.
With product that was made made here for those for those customers do you see any specific opportunities or is this something I guess two patent as you probably don't want to discuss and the color.
How do you how do you how do you look at that fresh opportunities and outdoor.
I mean I think good so there's there's two pages to that story, one is just our own discipline and execution, it's our continuing commitment to the product development and delivering the best solutions, you know LS I really made their name and outdoor and I still think that we have some of the best the very best outdoor products and solutions.
Her available there, but anytime there's a disruption in the industry like what's potentially going on right now I think that many of our agents in our customers kind of look around and they say who is truly committed who's going to provide a stable platform, who can I pick up the phone and know that I'm going to be able to get hold of the same.
Folks today is I I do tomorrow, including the senior management team. So yeah, I think there's some leighton and inherent opportunity in there and we'll certainly be.
Be looking to talk to as many folks as we can leverage at the best weekend.
Great and then last question, if I may Atlas versus the core legacy outside products can you comment about whether or not we're seeing similar growth rates. If one of them is outperforming the other.
If there still is an opportunity to take Alice I product and put it through the outlets channels and maybe use the Atlas manufacturing approach for incremental products. It looks like you see do you see synergies from this going forward.
Bunch of questions in there, but if you could provide and.
You know I look at Atlas as a standalone business in the stock inflow side right now and I think they perform best when when they do that we certainly share synergies purchasing volume pricing agreements things like that but I think they are best.
Were they know what they're they know where there were they do well they and we know where they do well and they know where we do well and the in the real that although there's some back office stuff the real.
Opportunity is to make sure that we're in a constant state of.
Complementing each other and not fighting each other we don't want to be trading business across lines and I don't think we've done that.
But overall I like the cadence we haven't I like the the the market. They go after is slightly different than the market LSAG goes after and I like that from the commercial standpoint on the back and we certainly trade all of our ideas. We worked collaboratively together, we look for the sooner.
Jeez from sourcing and that type of thing so I'm happy with that.
Certainly I'll look to turn that you know to turn that dial a few more notches every year by Ken.
But I am happy where they are right now.
That's good to hear thanks, again for taking my questions and it's great to see the continued progress.
Thanks, Craig.
Thank you. Our next question comes from Joseph Osha with JMP Securities. Please proceed with your question.
Hello, gentlemen, how are you.
Good morning, Joe Good morning, Joe.
So I Craig hit some of what I was interested and I did I do want to come back to this issue of working capital.
You generated a lot of oven improvement, which is is excellent.
Just looking at slide eight at kind of seems to me like.
62 million in working capital for a company generating 90 million in revenue per per quarter.
It is probably pretty efficient so I'm wondering you've made a lot of headway, but.
Eyeballing. This it would seem to me like that that probably most of those improvements are in the rear view mirror is that true or do you think theres more there.
Hi, Joe Kimco lease here.
Nice job six nine months ago debt, we were not as efficient as we needed to be working capital and most notably inventory and inventory management and so as Jim mentioned earlier and as we've outlined in the press release, we've been hard at work on a number initiatives.
Two.
To improve that and up great progress has been made by Mike back our leader of our operations team and and the rest of the sourcing and supply chain organization. So for our working capital in terms of dollars in our key metrics. There is days for us to be enough in the low sixtys our targeted.
I think we can get to the mid mid fiftys or so if we're really.
Clicking on all cylinders, so there's a bit left there, but the key about the improvement it's just not seeing a statistically it's the actions the initiatives behind it that made it happen and how that makes your business better how we get product out factory faster on time to the level of expectation to to our customers.
So so we feel good about the improvements and we have a bit of opportunity still still left there Joe.
Okay, Joe bark hearing I'd second that the story is not finished being is not finished.
And I do think that we'll we'll continue to have opportunity.
Okay.
Looking at another part of the balance sheet. So you down to 1.7 times debt to EBITDA good for you.
I'm curious as to whether there's a target there are necessarily and also whether you know as the business begins to to show more more stable behavior, which would it absolutely has.
Whether there's any opportunity to look at different ways to approach financing that debt.
Well you know it's funny, we were just we've had a number of conversations about this we do have good strong financial partner. We're always you know if we were operating in a good rhythm as we've just been talking about we're looking at all of those levers I don't we don't we don't reserve any lever.
And say you know, let's let's not touch that one what we might say is let's not touched that one right now I can't say that we have anything.
In mind immediately.
Maybe by the ended the year, but certainly is on our radar.
The other thing I mentioned in the comments was where we are right now gives us a lot of financial flexibility and gives us an opportunity to go look at some different things into look at things differently.
So.
Those are all on the table right now and I feel like we're in a good spot I feel like.
We've got a good opportunity to breathe and to look at things in we've still got some plans and momentum that will carry us through.
So theres no I mean, okay. So there's not a hard gold to say we wanted to take this down to one times debt to EBITDA.
You might imagine I mean, it's it's a it's big topline business is not obviously not huge yet and EBITDA level I don't know if you could go to the term b market or something like that or or is it the case that you're you're you're happy enough with your existing wider credit.
I'd say right now the simple answer is we are happy enough.
Wrapping up.
Good finding good financing partners are.
You know when when you have a good financial partner you want to you know you want to be fair on both sides of the equation right.
Yep Yep Yep.
You mentioned indoor it's interesting to me sort of looking at the competitive environment from from two to standpoint on the one hand, you could say you get the trade you had accrete trade the GE trade.
Yeah, maybe there are going to be in some disarray and an outdoor you wonder what's happening with root for example.
On the other here and maybe some of these areas where the other big companies are competitive in where are you not necessarily a core focus for you guys like indoor I'm just wondering.
Why at this point in time, you wouldn't want to necessarily continue to spend much time on into our portfolio versus really really hammering. This area of strength you have in outdoor and just curious about how you view that also in the context of again, all these businesses trading and what how that's manifesting anda.
Competitive environment.
Well, Joe what I want to attempting to say is it's not binary right. I mean, we have when we look at our entire product line. We have a solution set that serves our vertical markets very well right.
So in those vertical markets, we want to be able to come into a customer and start on the outside but follow the project through all the way ended the inside.
What I don't want to happen is to put is to reverse those where were you know where we're starting with a with a very large indoor product and minimizing maybe our outdoor exposure. It doesn't mean that we won't do it I, just saying that I'd like to see balance between the two very good portfolio and very good.
Solution set for indoor I think we can compete and we do compete very well. It's just that as you mentioned the top your question and the comment is is it.
Outdoor drives a higher quality of earning for us. So you know if I had my choice I'd rather see.
60% outdoor 40% indoor than the other way around.
And so you've almost view it as as outdoor or maybe even graphics kind of pulling some indoor business along along with it.
That's a good way I think that absolutely you know we.
We look at Oh, we look at our retrofit business, we look at C stores, we look at our vertical markets. We look at auto dealerships, we look at all a whole bunch of different vertical markets and they they have complex solutions, we want to be able to make sure. We maintain the ability to deliver that whole suite and a you know I think maybe the best way to articulate.
It is.
We can certainly say indoor and outdoor but I think the best way to articulate it is being domain experts in our vertical markets. When we focus on our vertical markets, we bring a credibility in a differentiation and we are recognized as the experts instead of just a.
Commoditized lighting supplier, yeah, I have everything, but im not an expert in any of it as opposed to LS site. We have a solution set its oriented to the key vertical markets. We play in and we're able to do many other markets because of that but we bring a lot of expertise in the verticals that we that we focus on.
Okay and then the last one from me just looking at graphics I was reading an interesting article the other day talking about.
Some of the improvements in targeting and content that.
Big information platforms, like like Google and so forth directly bringing to outdoor advertising is pretty interesting and I'm just wondering whether.
Some of your customers or potential customers, who haven't necessarily invested in in advanced outdoor graphics might sort of be looking at that more now given some of their content that they could potentially put out there and get get paid for.
I've talked about this before in terms of our graphics, because you have or because of the history. We have in the graphics in every spanning everything from print with very advanced materials, all the way into digital we get a seat at the table often.
We are recognized in I think we're under recognized in our services capability. Many of our customers are very happy to have this at the table because were adaptable in terms of the solution, but we have the skill set in terms of the deployment and the ability to reach across the United States are into Mexico, or whatever it is and make sure that the pro.
Project is managed correctly the materials arrive on time that permits are done correctly that to business case in the business interruption is factored into it.
That depth of experience we have it has extensive the technology that's coming into it right now you know adapting adjusting pricing on the slide you know looking at temperatures outside and favoring hot shrinks over cold drinks on cold days and things like that were able to roll with that technology capability, but it's all that.
Additional stuff the ability to deploy those solutions the ability to manage those installs.
The ability to adapt the overall.
The overall solution, that's what our customers really recognize Ellis island, where at the table.
Yes, okay.
Okay, well keep those technology.
You know that will stay ahead of that technology curve will stay in partner, we're not going to try to compete with Google we're going to try to be a partner.
Not necessarily partner with Google by the way just to partner with their technology.
Yes, yes.
Okay, well I could go all day, but I'll I'll control myself. So so thank you very much.
You're welcome Joe Thank you.
Thank you we have reached the end of our question answer session I'd like to pass the floor back over to Mr. Clark for any additional concluding comments.
I just wanted to say thank you again for your time in the attention I think it this quarter represents what's possible at LS I and.
Thank you as well articulated through the call today that it's about stability and it's about a platform being able to operate off of I think we have a lot of levers left the poll, we have a lot of opportunity left in the business.
You know I, thank the partners and customers investors in our own employees here for their continued commitment.
However, I have a good afternoon everyone.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.