Q4 2020 LSI Industries Inc Earnings Call

A question and answer session will follow the formal presentation.

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Good morning, everyone.

We issued a press release before the market open this morning detailing our fiscal fourth quarter results.

In conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate web site.

Www dot outside gosh industries Dot com.

Information contained in this presentation will be reference throughout today's conference call.

I would like to remind you that managements commentary and responses to questions on today's conference call May include forward looking statements about our business outlook.

Such statements involve risks and opportunities and 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 fourth quarter results.

At the conclusion of these prepared remarks, we will open the line for questions.

With that I'll turn the call over to Ellis like President and Chief Executive Officer, Jim Clark.

Thank you Jim Good morning, all in thank you for taking the time to join todays call in our last earnings call. We discussed our third quarter results in the initial impacts of Kobin 19 on our business.

Yes, I was deemed central business from the start you made the decision early Andre operational throughout the current challenge.

Creating a safe work environment in protection of our employees was mission number one we also worked for hard at finding ways to not only remain operational but actively look for ways in which we could add value to our customers.

Our U.S. manufacturing footprint and our previous work on diversifying our supply chain not only allowed us to continue to serve our customers with minimal interruption, but it also created an opportunity to pivot and provide some specific kobin related support, including social distance graphics and other products and services.

As you have likely seen from our recently released Q4 financials and the actions in efforts of the entire LS I team throughout the year in particular through the current challenge of Kobin 19 is allowed us to exit from our fourth quarter and our year profitably with increased earnings.

And your expansion of our gross margin lower operating cost strong cash flow generation and I'm happy to say the elimination of nearly $40 million in debt over the last 12 months.

No LS I is currently debt free.

One year ago, we started fiscal 2020 on a mission to shift our business away from Commoditized low value products to higher value solutions.

We created growth and future opportunities in many of the vertical markets that we serve including petroleum parking automotive quick serve retail grocery farmer.

Our team, including many of our partners had the courage and discipline to walk away from low value business and focus on markets, where we bring a much higher value to our customers and our company and shareholders.

This effort resulted in a 520 basis point gross margin improvement in lighting for the fourth quarter and a 310 Pip improvement overall for the year.

Although sales declined in the fourth quarter as a result of Kobin 19, our adjusted operating income in lighting was 2.9 million or 5% above prior year.

And 2.2 million in graphics up 64% versus prior year.

Jim Police will provide further comment on her exceptional financial performance for the quarter in the year.

Now shifting my comments to fiscal year 2021, I'm encouraged by the pace and progress of our company and their participation of our entire team.

Cobot 19, and the related headwinds may slow down our progress the efforts and professionalism for our employees in adapting to the new reality of our current environment has been outstanding.

On the lighting side of the business in Q4, we completed the Buildout of our product development and marketing team and we introduced several new products not including those introduced by Atlas and more than 20, new products for the year in 22 warning.

Under our current plan for 2021, we will introduce an additional 20 new products. These products and solutions reflect in alignment with our vertical markets and provide further differentiation from low quality commoditize products.

The integration of an entry level controls platform across our entire product line. The continued improvement in energy usage, coupled with higher output and improve visual comfort well add to the differentiation in value we frequently talk about.

Building on our plan of understanding our markets in separating ourselves from our commodity solutions.

We will add three new vertical markets to our focus over the next year.

When we complete these growth plans, along with our engineering manufacturing marketing and sales team I feel we'll compete on a different level and we earned the right to win in the markets we working.

On the graphic side of the business, we've experienced surprisingly minimal disruption to our ongoing and proposed future projects.

Our customer commitments in plans have not changed significantly in the petroleum grocery farmer and quick serve retail environments.

You had to work around deployment installation schedules occasionally as covert hot spots of emerge but for the most part it has been business as usual.

In Q4, we completed the move of our graphics facility in our canton Akron a location.

This new location has had an immediate improvement on our productivity and we look to leverage this even further as we move into 2021 and beyond.

Although these are uncertain an unprecedented times our outlook remains focused on the things, we can control and the execution of well thought out strategic plans.

We've made adjustments to reflect the environment, but we still feel as though we are in charge of creating the opportunities and continuing to build and grow our company.

For those who you regularly follow our company in our calls I think the past quarter reflects our high say do ratio and our commitment to execution.

We spent the last 18 months transforming LSAG into a better performing company and I believe our S. Best days are still lie ahead of us.

With that I'll turn it back over to Jim Gliese for comments on our financials.

Thank you Jim and good morning, everyone.

To summarize key fiscal fourth quarter financial Statistics net income was 1.5 million compared to net income of 900000 last year.

Earnings per diluted share were six cents versus three cents in the fourth quarter fiscal 2019.

EBITDA was 3.9 million versus 2.2 million in the prior year.

As a result, as a pandemic impact on construction activity sales declined 22%.

On a non-GAAP basis, adjusted net income was 1.7 billion compared to income of 100000 in the same period prior year.

Non-GAAP earnings per diluted share were six cents.

Versus zero earnings per share in the fourth quarter last year.

Adjusted EBITDA was 4.5 billion compared to three point Threemillion prior year.

A complete reconciliation of fourth quarter GAAP and non-GAAP results is contained in our press release and 10-K.

The company generated 11.5 million a free cash flow in Q4, eliminating all net debt and resulting in a cash balance of 3.5 million at the end of fiscal 2020.

This compares to net debt of 39.5 million at the end of Q4 fiscal 2019.

Full year free cash flow was 47.1 million.

With the onset of cobot the company implemented multiple actions to reduce costs on both an ongoing and an interim basis.

Contributing to our fourth quarter results. This included adjusting headcount required to support the cobot driven lower sales.

And reducing discretionary spending and all major categories of operating expenses.

We continue to invest in new products and other commercial initiatives.

For the completed fiscal year 2020, adjusted net income was 3.2 million compared to 1 million in fiscal 2019.

Adjusted earnings per share were 12 cents versus four cents for the prior year.

Adjusted EBITDA was 15 million for fiscal 2020.

Sales finished at 306 million.

A regular cash dividend a five cents per share was declared payable September eightth for shareholders of record on August 31st.

Moving to our two reportable segments.

Fourth quarter lighting, adjusted operating income increased 5% to 2.9 million.

The gross margin rate improved 520 basis points to 28.6% and operating expenses decreased 18%.

The increased margin rate continues an improving trend of the last several quarters, reflecting lower manufacturing fixed costs, the transition to higher quality sales mix and recent actions to reduce operating costs.

This also reflects the number of new and cost reduced product launched in fiscal 2020.

Sales declined to 41 million for the quarter influenced by the pandemic. However, recent book to Bill activity has exceeded 1.0, an indication that construction activity is gradually recover.

Shifting to the graphics segment graphics generate a solid quarter with adjusted operating income of 2.2 million versus 800000 last year.

Sales declined 6% as depend demick delayed installation schedules.

Operating expenses declined 1.7 million.

Reflecting the organization restructurings that occurred earlier in the fiscal year as well as recent cost actions.

The graphics gross margin rate was flat to last year, reflecting the current mix of programs.

We exit fiscal 2020 with a strong graphics backlog and do not expect any changes to our large multiyear customer program commitments.

However in the near term, we do anticipate project installations schedules may be extended due due to pandemic related disruptions.

Lastly, our north Canton, Ohio Real relocation project was completed with the move seamless to our customer base.

I'll now return the call back to the moderator.

And at this time, we will be conducting a question answer session. If he would like to ask a question. Please press star one on your telephone keypad.

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One moment, please while we pull for questions.

Our first question is from I mean, now with H.C. Wainwright.

Please proceed with your question.

Thank you good morning, everyone.

Well just wonder for say a congratulations on managing through this be entered into such mostly results.

In terms of you know the outlook for sort of next year.

Looks like there are some interesting growth drivers.

Please see you guys, including new product launches.

Could you give us any color on you know what type of growth, we should potentially I anticipate.

You know I'm interested in Greenland.

5% to 10% is that reasonable or do you think you know you're becoming an even higher.

Yeah, Yeah. Thank you for joining the call today and thank you for the question and the comments you know I have to be completely honest a it you know things you're still in such a state of flux, it's very difficult.

For us to forecast, what we anticipate our growth rate to be for the year. I mean, I think we've put multiple scenarios down on paper and we're really were prepared and ready to pivot based on how the market reacts as you know there's so many factors at play.

And construction not being one small I mean grown a virus I'd be more in small element in that whole thing.

The way it affects our you know our lighting business in particular and even our graphics business is disruption in our ability to do installations and things like that although we haven't had any projects cancel or anything we have had some push out mostly because of flare ups and hot spots and difficulty.

Getting installations done and things like that.

Oh I could only say there right now given the visibility I have you know.

You know among into into our new fiscal year.

I can't say anything.

Just don't know to tell you on that's true but.

But I will say that we're in a underline that we're prepared to you know pivot quickly depending on how growth in house sales continued to come in.

And I mentioned in my comments, we have a number of new verticals that we're going after and so you know the combination of those two things are going to ultimately put US you know are going to bring us to the end and whether that's a flat or up or down.

I think we'll know more as we as we continue to travel through the year.

Just one question Jim I had on the new verticals elements. You mentioned goes you said she already goals.

Could you give us color those verticals are and you know what Ken resources, we use sort of deal flying to me.

Those areas.

Yeah, so as Ive spoken over the you know last a year and a half or so.

You know we wanted to make sure we got things right and we built that better company before we built a bigger company. Despite that the Corona virus in the environment in general we're ready to make investments and a you know I've spoken a pretty openly in the last couple of calls about acquisitions and.

M&A activity that we remain committed to.

But we're also making investments in sales.

Sales in a couple other areas and so we're ready to we're ready to make those investments to drive that growth I don't want to talk specifically about the verticals that we're going in because to be completely Frank what we're doing is a we're in a process of validating.

If we put together a list as much greater than three but we're in the process right now is validating the momentum we can create in those markets and.

How those markets fit in the current environment right now so that's a that's certainly something that's all in the mix, but I don't I really don't want to say what those verticals are.

At this point, but they will pivot or they'll build on top of the successes we've had in the in the verticals that we do very well and now you know Petro auto.

Quick serve retail grocery farmer being one that has been particularly strong lately that type of thing.

Got it now and then just one last one from me.

These lowered operating costs in this quarter are these.

Going to remain in place for the next few quarters.

How should we still need to see you know.

Yeah, there's going to sort of come out in the Mexiscan quarterly basis.

Yeah, I think structurally we could you know we could maintain where we are in there might even be some additional opportunity, but as I. Just said a minute ago, we are going to be very.

Deliberate and making some investments right now a you know kind of that thinking well everybody is going north let's go south or let me flip that around well everybody has got to south let's go north up so we're going to Oh, we can continue to maintain a structural costs and that type of thing we're going to be looking for ways of making some investments right now.

Yeah.

[noise], so you might see some flux in that.

Okay got it got it.

Well, that's all of those I take my other questions offline.

Alright. Thank you. Thank you for taking the time be on the call.

Our next question is from quite early with lots of capital. Please proceed with your question.

Hey, Good morning. This is a Andrew on for Craig I just want to.

Hey, congrats on a quarter and associate deleveraging the balance sheet you guys made some great progress there.

So my first question change the graphics segment. It looks like you guys. Mike you want to have some margin expansion in the upcoming year, especially as you progress along on these early stage programs, assuming he environment opens up you can execute on some projects a any any commentary there.

The margin and the outlook in the segment.

Oh, good Andrew Thanks for joining the call and I think you're spot on we do see some opportunity there.

Obviously, I think that you know it goes without saying and I'm sure that every call that's going on over the last few months is underlining the uncertainty over the environment, but given the normal world. We certainly see the opportunity when were in early stage. A you know we go through a learning process in an efficiency.

Curve as we get.

Closer to the project in that type of thing.

Number of the projects we're working on currently right now we've gone through that maturity curve and so we are starting to see improved margins and we do anticipate that we'll be able to continue to exercise that.

Obviously, that's offset with a new projects that we bring in so there's a kind of continuing cycle going on.

But we definitely do see some opportunity that coupled with a number of efficiencies we gained in the in the canton Akron move and some other projects we've been working on.

Great. Thank you.

And second question here.

My might not be able to.

We are able to try to many comments, but.

Congrats and book to Bill back over one have you guys been able to execute on some projects in Q1 that made and pushed out into Q4 is still pretty just on certain out there and and things are just.

Go on day to day now.

No we've absolutely picked up some projects in Q1 that were pushed from Q4, but I'll be candid we would have some in Q1 that are pushing to Q twos.

It's kind of one hand gives him when he takes away. So you know the good news in our underlying is is that we haven't seen any significant disruption or cancellations.

Particularly as a as I mentioned in my comments, Jim underlined on on the graphics front and this is not just isolated to our petroleum, but you know quick serve retail our digital menu systems in our print those have been very very active quite active.

And we haven't seen any fallout in those.

Great sounds good thanks for the answers there and congrats on the quarter once again.

Andrew Thanks for taking the time tell Craig we miss them.

Well on down.

Our next question is from Rick fearing wit.

Right.

Yes. Please proceed with your question.

Hi, Good morning, guys and congratulations on a great quarter during challenging times.

Just.

Wanted to talk little bit more about the gross margin improvement, particularly.

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Lighting, and then as it relates to graphics, which sounds like a function of how project so ramping.

And was wondering if you guys.

I had some gross margin targets by segment, if it's not it's well if that's purely a function of the type of project, but yet you're taking on at the at the time.

Good morning wreck and thanks for joining the call and we definitely do have targets I don't know if I want to.

Broadly share you know we're working we're always looking for continuing improvement and I think there's room for us left here.

You know early stage projects, even in our lighting side tend to you know we were willing to work with the margin and then find ways to improve it through operating efficiencies and others value added services additional offerings either product or service offerings, we can give and those are what usually contribute.

To our margin improvement I think we have room at an all fronts or even with our established customers.

We continue to kind of incrementally move that.

That's great.

What you've done thus far gyms incredibly impressive the I know you inherited stocking flow business that probably would not.

Your first choice and it'll be particularly interesting here about the new verticals that you you and the team identified for future growth opportunities is that no doubt will factor into.

Continued margin improvement so.

But what you've done existing business is really impressive on the operating expense side is.

Equally impressive and just yet.

Yes, you make fun.

Last quarter you outlined.

Some improvements that no already showing showing through in this quarter's results and you'll see is or other low hanging fruit for SGT reductions or are we kind of.

A good stayed at this point.

You know so I do see I think that as a team we do see some some continuing opportunity there, but as I was mentioning earlier, we're making a purposeful decision right now to take it in start doing some investments. So you may see some lumpiness in that if it may not you know we made it may turn out.

We continue to get the incremental improvement and stuff, but I also at the same time want to start making these investments.

I mentioned the expansion into some new verticals. So there's an expense associated with that as we get.

As we get involved in there and we get to support material and we make decisions and and test the various markets. So you know in the simplest terms I want to you know I want to make some investments here.

So it could put some pressure on that but we still do see opportunities if things worked out great. The opportunities will equalize the investments, but you know I want to leave a little attitude for the company and for our team to make sure that nobody feels any pressure too you know a look past the door the potential dollar.

Opportunities what were Jason you know a smaller pennies so to speak so I do have definitely see opportunity for continuing SGN a reductions, but I also do want to make some investments. So we'll see how those two balance each other.

Yeah totally understood and I'm sure some of those investments will be operating expense rather than capitalized spend so.

That.

You know those there'll be a lag no no doubt those investments you when those are done in kind of when you get to that steady state I guess.

The assumption has to be where youve identified or moved into the new.

Verticals, but with the existing business do you have oh.

A reasonable sort of EBITDA margin target in mind or.

Is that also going to be a function of diversifying into some high margin verticals.

You know so one of the things we talk about often is a trade off of that a lower quality business for the higher quality business.

Anything that we develop right now from a vertical standpoint, although it may have some initial cost associated with it.

No to get us off the ground, our pursuit would definitely be in line with maintaining that growth on the margin and ultimately EBITDA margin. So I think that our initial.

List in our initial approaches have been very mindful of that so my expectation is that we'll continue to make incremental improvements on that.

Scraped soon.

Jim I know this is <unk>.

Or even the team, it's really about the blocking and tackling still and so.

The results are seeking put themselves but.

And I know, you're getting great advice already on the Investor Relations side, it's just.

Wondering if you'd given thought to possibly hosting.

Past call or or something sort to lay out or expand on instances of initiatives when when you and.

The team feel like the prepared to roll that out.

Is there some.

No opportunity get out there I know in this environment, it's hard to do in person, but even a webcast.

Yeah, we certainly would like to do something like that I'll be candid you know as you probably know and most of the folks on this call. There's been a number of you know firms that have been and trying to advance their standard conferences and stuff through virtual meetings and things like that.

We are you know we've been supportive of participating in the ones that we normally do and we have.

In fact, just talked recently about you know doing some virtual.

Meetings, I can't say that I've advanced it we have advanced it much Rick at this point.

But I hear you and we certainly feel.

Feel handicap that we can't get out and talk about this message I mean, I will tell you internally, we feel like we're building some momentum here.

You know even it with the headwinds of Covidien all the other things I think their financial results of our fourth quarter and our year speak to that and you know it is is slightly frustrating that were not able to.

Have a party.

And get out in talk about these things a little bit.

So we are we happen talking about those internally, but I will say that it hasn't.

Advanced much.

Yep understood well, thanks again for thanks for taking my questions first of all in that.

Congrats on the great results and thanks for all the hard work on behalf of stakeholders.

Oh. Thank you. Thank you, we're taking the time to be on the call.

Fluctuation.

We have reached the end of the answer your question answer session and I'll now turn the call back over to Jim Clark for closing remarks.

I just want to thank everyone again for getting on the call in spending a few minutes with those.

I do think that to I do want to acknowledge the efforts of the entire company the employees in the in the team the confidence of the investors in Oh, a site I am when you think about the uncertainty and the challenges that were faced in the latter part of Q3 in Q4, and then I measured against the results in our.

We've had.

Much to Rick's point, just a few minutes ago I wish you a way that we could more broadly share. This a outside of just even this call and we will do our best to make sure it's done but.

I just to Im very happy with the progress we made in I think we've got a lot of opportunity ahead of us a in 2021 and beyond.

Even despite these headwinds we are very committed to growing the company and we are excited internally about the opportunities that we've already put on a preliminary slate and the progress that we've been able to make so far I will look forward to a speaking with each of you as soon as we can and I want to thank you again for two.

Taking the time to be on the call stay safe and we'll look forward to our next interaction ticker.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.