Q1 2021 LSI Industries Inc Earnings Call
Welcome to the L. aside industries.
<unk> first quarter 2021 earnings conference call at this time, all participants are in a listen only mode. A brief question and answer 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 it is now my pleasure.
Your host Mr., Jim Galifi, 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 this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website at Www Dot <unk> Corp Dot com.
Information contained in this presentation will be referenced throughout todays 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.
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 remarks summarizing our fiscal first 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 L., Aside President and Chief Executive Officer, Jim Clark.
Thank you Jim Good morning, all and thank you for joining todays call as you have likely seen from our press release issued earlier today you have several things to talk about and I'd like to jump right in give you some additional details.
Let me first note that despite uncertainty around the general marketplace and overall market activity, which has been hampered by code that we have found a number of ways to adjust to the conditions, while remaining competitive and committed to the transformation and ongoing improvements of our business.
Employee safety remains at the forefront of our plans and actions although Cobra. It is no longer new it is something we continue to deal with daily.
We remain committed to ensuring a safe environment for our employees, our partners customers and suppliers and in finding ways to continue to be effective and adaptable.
Now jumping into the business although.
Although lighting sales were down for the quarter I'm encouraged that we have seen little to no project cancellations.
Construction activity continues to fluctuate depending on the region and various corporate Florida.
Which has caused some delays in our committed project book, but again no notable cancellations.
On the other side of that coin, we've seen a market increase in request for short lead time projects and competitive conversions.
Our U.S. based manufacturing and our previous work in diversifying or supply chain over the last year is allowing us to respond to a number of these short lead time inquiries and we're working hard to convert and accommodate as many of these opportunities as possible.
I'd also like to note that our average daily quote activity continues to increase along with a month over month sequential improvement in our order rate throughout the first quarter were continuing to see that pace improve in the second quarter.
As we mentioned now for some time, we made a purposeful decision over a year ago to move away from price sensitive highly commoditized business and focus instead on markets, where we can differentiate ourselves and our products. This.
This commitment to higher value market based approach is demonstrated in a 290 basis point gross margin improvement for the quarter, bringing our lighting margins to our highest level in years.
We've been laser focused on key vertical markets, including petroleum.
Automotive grocery farmer, QSR warehousing transportation and sports core lighting.
We celebrated some notable wins in lighting in the last quarter, including two outdoor projects for the world's largest E retailer and several early stage projects in our automotive vertical.
Our automotive projects are focused on whole site or approach, we're providing the complete lighting a solution from lock to show room show up the service area and everything in between.
In many cases, we're working directly with the auto manufacturers to develop specifications, which are then rolled out to the individual dealers assuring consistency and uniformity in their lighting.
We're excited by the momentum we are gaining here and the possibilities ahead.
In our stock and flow business, primarily through Atlas, we've seen a strong recovery in Q1 distributor.
Distributors that had been de stocking in the fourth quarter and through part of the first quarter come back strong.
We are encouraged at the improved order rate and inquiries.
Atlas is in the process of rolling out two additional brands or products, creating a new opportunity on the value side of the business and we're excited to see where that will go.
From a commercial activity standpoint, and in the absence of trade shows and in person customer and agent engagement, we're investing in a number of sales and marketing related activities to develop leads for our partners and our agents and increase the overall awareness of our solutions and our target vertical markets.
Just last month, we introduced a new web site and populated it with a slew of case studies in collateral material for our partners.
We are investing in increased advertising in our focused vertical markets and we remain committed to the introduction of new products.
In 2020, we added 20, new products and in 2021, we intend to introduce even more.
Our product marketing team along with our engineering team has in fact shortened our standard development time by more than 30%.
And the design of new products, they're assuring ease of manufacturing maintaining quality and looking for ease of installation and service.
This is a real win for our customers partners and for our overall competitiveness in the marketplace. It underlines the investments, we're making in the business to compete on an entirely different level.
Turning our attention to graphics I'm happy to say, we are near pre tip brand demick levels with sales in graphics, just 4% below prior year.
Our pipeline remains strong in the petroleum side with several new projects in various stages of development.
Our business in Mexico is recovering nicely as installation and government approvals continue to increase.
We are showing growth in our grocery and farmers face, including or a couple of rebranding projects and a new store openings for two large grocery chains. This.
This business makes good use of our facilities and operational improvements in both Houston, Texas and Akron, Ohio.
I've talked previously about expanding our share of wallet in our existing verticals and I'd like to comment on the projects. We are working on this quarter right.
Recently, we were awarded a multimillion dollar product and services contract from one of the world's largest petroleum retailers.
In Q2, we will produced shipped and manage the installation of a digital wallet contact lists pay at the pump solution for approximately 11000 U.S. locations. This.
This project utilizes LSAG digital print technology logistics and project management capabilities to install an innovative near field communication and QR code solution, allowing customers to use their smartphones to pay at the pump and a contact lose fashion.
This project spending that worked for some time and we're proud to have been selected as the right partner for this program.
Lastly, I want to talk about our strategy going forward.
Our goal is to be a 500 million dollar company with double digit EBITDA and 2025.
Our path forward is designed around four elements number one expand our an increase our vertical market presence, we do better and deliver higher value when we focus.
Number two change or a customer engagement.
Means, creating a higher level of commercial awareness of our products services and solutions and developing more qualified leads for our agents and our partners.
Number three build our services business.
We have a great opportunity here and we'll have more success stories to share around that.
And number four accelerate our growth through acquisitions.
This path forward is outlined in greater detail in our investor deck, which can be found on our website under the investors section.
If you've not seen it I encourage you to go take a look.
Despite the challenges of the current environment I'm encouraged by the momentum and energy we've been able to develop.
We're in a strong financial position with nearly 85 million of immediate liquidity available.
We remain focused on improving and growing our business, both organically and through M&A and I'm confident in our best days are ahead of us.
Thank you again for your time and interest in Alice I.
With that I'll turn the call over to Jim Gleaves for comments on our financial performance Jim.
Jim.
Thank you Jim and good morning, everyone I'll start by highlighting key financial statistics for the fiscal first quarter sales.
Sales were 70 million improving sequentially from Q4, but below prior year as projected.
Net income was 2 million compared to income of 4.5 million in the fiscal first quarter of last year. It's important to note that prior year first quarter results included a nonrecurring pre tax gain of 4.8 million, resulting from a facility sale.
On a non-GAAP basis, adjusted net income increased 29% to 2.1 million versus income of 1.6 million in the same period last year.
Earnings per diluted share were seven cents versus 17 cents in the first quarter fiscal 20.
Non-GAAP earnings per diluted share were eight cents versus six cents per share in Q1 last year.
Adjusted EBITDA was 4.7 million were 6.8% of sales 90 basis points above last year.
A complete reconciliation of first quarter GAAP and non-GAAP results is contained in our press release and 10-Q.
The company generated 7.2 million of free cash flow in Q1 exiting the fiscal first quarter with total cash balance of 9.5 million along.
Along with $75 million availability on the company's revolving credit facility.
The company has no long term debt at the end of the first quarter.
The improved liquidity provides the capital allocation flexibility to invest in the key initiatives, which support our strategic priorities.
A regular cash dividend of five cents per share was declared payable November 17th to shareholders of record on November nine.
Moving to our two reportable segments.
Graphic segment experienced a sharp rebound in the first quarter with sales approaching pre pandemic levels.
Sales decreased 4% strictly the result of ongoing project schedule delays.
Market activity remains favorable as commitments for the six major multi year programs with petroleum C store companies remain in process and largely unchanged.
Growth continues in Mexico with sales, increasing 88% year over year in the first quarter.
New business development activity remains high with our teams working closely with multiple companies on potential programs.
Year over year graphic sales growth is projected for the next several quarters.
Adjusted operating income increased significantly for the graphic segment with first quarter first quarter income of 1.9 million versus $1.1 million in the prior year.
Leverage generated by our improved graphics cost structure contributed to the results.
Shifting to lying as projected the pandemic driven slowdown and lower project backlog exiting the fourth quarter resulted in lower first quarter sales.
Rotation in order activity increased steadily throughout the first quarter generating an increased backlog entering Q2.
Distributor stock and flow activity also increased significantly from the fourth quarter evidenced that the distributor destocking has stabilized and market activity is improving.
Two major lighting product programs were approved in Q1, including a development program for a new architectural fixture range, representing one of the many new products to be launched in fiscal 2021.
The adjusted gross margin rate trend for lighting continues to improve increasing 290 basis points to 30.5%.
Combination of the ongoing impact of our focus on higher value market applications, new products design cost reductions and manufacturing efficiencies.
First quarter lighting adjusted operating income was 3.7 million increasing to 8.1% of sales an improvement of 90 basis points compared to Q1 last year.
I'll now turn the call back to the moderator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue.
Press Star two if you'd like to have your questions on the queue for partners.
Do you think speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please for your questions.
Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.
Thank you good morning, everyone.
Really strong results or just better than expected.
Last quarter, you had commented that you know the.
The fiscal first quarter could be the weakest for the year.
Do you still maintain that view.
Matt Good morning, Jim Clark here and thanks for joining the call today, Yeah, I mean, I think that our comments last on the last call wearing particularly in comparison to our Q1 last year, we had a very strong quarter, we knew coming into Q1. This year that we had probably.
Our next year, we're pushing.
And we're still experiencing that as I mentioned, a few minutes ago, they're not canceling.
Theres a number of challenges you know covin flare ups.
Permitting in electrical permits inspections.
And just general labor on some of the construction sites on some of the projects. We've been on have held up some of that some of the order flow out the door. The orders have remained committed but we just haven't been able to get the customers haven't wanted the product yet.
Typically lighting goes in so.
Later in the project cycle. So we feel very confident that there aren't going to be any cancellations because most of the work is normally done by the time, we're getting lighting on on site.
But yes, we did.
We did feel like this Q1 was ended up about where we thought it would be.
Understood.
And then just moving on to this new digital wallet product since it sounds really interesting.
Is this a similar business model.
To your other products. So do you also have maybe some recurring revenue component to be here and do you believe there could be other opportunities with deployment of a similar solution from other customers or do you have the same customer unifill. So.
Facilities.
I'm sorry, you cut out on the first part of that of that question. So I didn't hear.
What you are referencing.
Yeah, the digital wallet product, okay very good yeah, just wanted to see if that is.
It's in the one time sale or does there may be a recurring revenue component to this offering what are the opportunities for the deployments of this.
Solution.
You know in our digital menu side of things, we do have a recurring revenue model associated with that updates maintenance services that type of thing and recurring revenue is something that we are definitely focusing on building continuing to build out. This digital wallet solution I will not have any recurring revenue associated with it.
But we do see it as a potential opportunity, particularly over the next year.
Many of you may know the euro visa Mastercard payment system or chip system in their credit cards.
Is required by April by mid April or so of 2021, the credit card companies get to move a lot of liability back to merge.
Merchants that do not.
You know install a new card readers or have a multi factor authentication systems in place. So there is an incentive for a lot of companies.
Particularly in the spaces, we play whether it's grocery pharma retail.
Petroleum et cetera to have alternative payment methods, we use our graphics group in this particular case through the digital wallet to have both the near field.
Communications capability and a QR code capability will allow things like Apple pay and Google paid.
To support both Android and Apple phones. So we see this this.
This demonstration of being able to roll out 11000 locations in a fairly short amount of time this.
This could be something that creates opportunity for us going into the next couple of quarters and it's particularly important right. Now were you getting account contact lease payment type option. There's no exchange of cards, there's no keypads to press you.
Are you using your own digital.
Product to your mobile phone to make the payment. So there is no recurring revenue component to it but it could be something that we continue to deliver here over the next few quarters or longer.
Understood.
Yeah, I think my other questions offline. Thank you so much.
Well. Thank you. Thank you for taking the time to be on the call today.
Thank you. Our next question comes from the line of Craig Irwin with Roth Capital Partners. Please proceed with your question.
Good morning.
Can you.
Sorry can you maybe talk a little bit about the specific products that are higher margin in the lighting segment that are driving the gross margin gains.
This.
A couple of products a group of products and is this continuation of what we saw in the prior quarter and where is sort of the upper ceiling on on the benefit from us to meet do we get to the mid Thirtys.
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Any color would be helpful.
Yeah, Good morning, Craig and thank you for being on the call. We always appreciate hearing your voice.
The projects their products are are typically project related in their outdoor oriented.
We have a full product solution indoor outdoor and when we usually combine those.
We do very well from a margin standpoint.
I think where we got lost you know a few years back.
Was when we focused we started overwhelming our manufacturing with lower priced a indoor as is our lead.
When we have a project that has a combination of indoor and outdoor we can move that margin.
We in those products you know we're looking for optical control. We're looking for cut off we're looking for things that we believe customers value. They aren't found in the car and the commodities products. So the more we are involved in those projects and the more we are more disciplined on the on the.
Very cost.
By type projects the better we do.
I do think that the mid Thirtys are possible I think that.
You know, our probably our improvement rate will slow slightly from a quarter over quarter as we start to get closer and closer to those mid thirtys, but I was very happy to get into the Thirtys in A. I think looking back is one of our best positions from a margin standpoint, we've had in lighting in quite some time, yes, hi, Craig.
Hi, Jim Goalies here.
I'll comment on that as well we've been working hard to move our margin rates forward and we're very pleased with where we're at theres been multiple levers contributing to that.
Probably the largest being the movement to higher margin applications, but also our 20 new products that we launched last year. We've seen some nice design cost savings and then of course the actions we've taken to right size, our manufacturing fixed cost footprint you have all country.
EBITDA. So our objective is to continue to drive that continuous improvement continue to work all those levers and we want to keep moving the lighting gross margin rate forward continuously.
Continuously and looking at it on a year over year basis.
Excellent.
First question I wanted to ask was about the two parking lot projects you mentioned in your release that you.
You did for the world's largest E. Tailer I guess I guess, we can assume that Thats Amazon did you do those directly for Amazon or.
Our.
We know that most of their warehouses and distribution facilities are actually under lease where pro low just it's the the provider of.
The assets and they simply just pay rent right was this done four per logia support for Amazon and.
What sort of a tempo and we expect here because.
Hello, just is in the process of retrofitting, a large number of pryor facilities and building many more new facilities.
And can you maybe just comment if you see more of an opportunity there on the the new facility side or the retrofit side.
And so the answer to both of those is yes, we do see opportunity.
Both in the retrofit and new facilities are these two particular projects were a combination of our partners in the property owners, but certainly a lot of input from the end use customer info.
In fact.
We believe it was that kind of that influence in the ability to kind of articulate the performance of the lights here.
Here's a good situation here's a good underlying a good example of just kind of light cut off light pollution.
Looking at it and being able to articulate the performance of the lights not just in terms of how we're able to do to light the facility in the locations and the loading docks in the parking lot, but also to be a good neighbor and make sure we're not having that kind of light bleed over into other locations and that type of thing.
I think there is a certain segment of customers in this customer being one of them.
I can appreciate being a good neighbor and making sure that they're getting the performance that.
That were you know that we are committed to delivering so I do think that that story will continue to resonate and it is something we're trying to demonstrate by doing and as opposed to saying and we are trying to leverage. These two success stories into a bigger opportunity.
Do you have any any business in backlog for execution in the December quarter from that same customer.
Yeah.
I don't want to comment on that right now, but the backlogs up I'll say I'll say that but.
Hi, just to respect the you know the the process and stuff I don't I don't want to say any specifics about.
This customer anything okay. Okay excellent. So then just to circle up on the QSR.
The large TSR program that you mentioned as well both in your prepared remarks and in the release the $100 million program you announced in July.
You said in the release, the orders doubled or more than doubled.
Which is really good news, it's nice to see.
The graphics business getting getting some good momentum here.
What is the approximate timeline for completing the full $100 million in scope there.
Does this mean that the $100 million, maybe Barnes a little faster.
But were really looking at a.
A low single digit number of years.
What can you share with us first I understand sort of how this supports our size graphics business over the next few years.
Yeah, right now I mean from a schedule standpoint, we're anticipating two years.
Remaining in the schedule, but I will say that you know the success, we've had and the traction we are getting.
Is creating additional opportunities it might be a little premature to say too much right now, but we believe there is.
There is a significant piece of follow on business.
We've been in discussions with for some time we've.
We've we've done.
Demos of our proposed solution and put proposals in front and we believe we have a.
A pretty strong position, where you know in our proposal and their request and it might be a little premature to say anything right now, but we see that this just with this single customer.
Two year run on this on the initial project from July and in likely follow on orders and I'm sure I'll be able to comment about them in the coming quarter.
Okay excellent and then last question if I may.
There are some obvious lessons learned at L. aside from the acquisition of Atlas and some of the missteps. There now that your balance sheet isn't just much better condition than it has been for the last few years.
It looks like you're in a position where you could potentially move.
Move Opportunistically, if something was it was a good fit with the the outlet side.
Hi, Brandon L. cyclic with assets, how eager our year to complete an acquisition here and what are the basic characters.
Characteristics, you're looking for in in acquisition candidates today.
Okay, well first of all we're have I'm not going to debate that we had some missteps.
Actually with Atlas, but we're very happy with Atlas.
And I think they've done a great job I commented on a little bit but.
Their recovery here in Q1 has been significant and they are gaining some momentum in fact I'll just mention that they have in refreshed a pro.
Product line product offering in their independent series, and they're bringing a whole nother category online, which we'll talk about next quarter.
We are our plans are definitely to grow.
Organically and through acquisition as you know Greg you've been in this for a long time, you know acquisitions, we have.
We have some things that we think would fit well, but but those folks may not be ready to move we.
We have some things where we we think that we could partner up in a way that might be different.
And it's really getting that story out and getting.
Getting those folks too.
You know get onboard with US right now I think that what we're doing is we're filling the top of the funnel with a number of different targets and as you know you put a lot into the top in only a few come out the bottom. So we do plan on being very opportunistic and.
We are also not just locked into.
What people might consider traditional core lighting solutions. We're looking at adjacent sees we're looking at things where we can offer.
Offer.
Broader solution and.
Get a better share of wallet with the customers, where we have that domain expertise. That's why vertical markets tend to be so important to us. We can go in and have a different conversation with our customers than just being a manufacturer product supplier and as you've seen two I'll. Just mention you know services is becoming a bigger.
Piece of our value equation to our customers.
And just just a point of clarification am I correct in the assumption that you are much more likely to complete an acquisition.
For the lighting side of your business, rather than the graphic side or do you kind of see equal potential for occur.
Accretive growth in both of these sides of the house.
Hi, I see opportunities in both of.
If you look at traditional print graphic or digital graphics is probably not on our list, but if it's things that augment that you know like digital signage was something that we think there is a lot of lot of expansion in whether it's.
Maybe additional structure or services audio communications things like that within the graphics group are attractive to us and are things. We're looking at and then from a lighting perspective, we want to do things that continue we want to bring on things you continue to add to our portfolio in the solution set to our.
Customers, but we want to be careful about getting into just a me too products or commodity position.
Understood Congratulations on the progress this quarter impressive result.
Thank you Craig Thanks for the time too.
Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Mr. Clark for any closing remarks.
Thank you operator, I just want to thank everyone again for taking the time I realize is a busy time of year. There is a lot going on.
We're very happy with the progress we continue to make it all as high we're always open if you have any specific questions. You are one on one that youd like to have please don't hesitate to contact us in the meantime, thank you very much and we'll look forward to talking to you next quarter take care.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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