Q2 2021 LSI Industries Inc Earnings Call
Greetings and welcome to LSI industries fiscal second quarter, 'twenty 'twenty, One conference call.
At this time all parts of events are in a listen only mode.
A 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 the reminder of this conference is being recorded it is now my pleasure to introduce your host Jim Go East Chief Financial Officer. Thank you you may begin.
Good morning, everyone. We issued a press release before the market opened this morning detailing our fiscal second quarter results.
In conjunction with this release, we also posted a conference call presentation, and the Investor Relations portion of our corporate website at Www Dot LSI Corp Dot com.
Information contained in this presentation will be referenced throughout today's conference call.
Included are certain non-GAAP measures for improved transparency of our operating results.
A complete reconciliation of second quarter GAAP and non-GAAP results is contained in our press release and 10-Q.
I would like to remind you that management's 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 morning's press release as well as our most recent 10-K and 10-Q.
Today's call will begin with remarks summarizing our fiscal second quarter results at.
At the conclusion of these prepared remarks, we will open the line for questions.
With that I'll turn the call over to LSI, President and Chief Executive Officer, Jim Clark.
Good morning, and happy New year, and thank you for joining today's call in 2019, we sat down and as a team to transform our company with the purpose of developing and refining our focus on creating a growth oriented competitive and defensible position in the marketplace.
The underpinning of our strategy has been around the development of vertical markets, where we can better serve and understand the needs of our customers with the goal of adding value to differentiate ourselves from our competitors and general market Commoditization.
This differentiation has achieved not only through our product offerings, but how we design and package those products along with the services we offer.
And this aspect the LSI is unique and the way we work with our agents and partners and how we use lighting graphics and our installation services to better serve our customers.
I'm happy to say that our results and this quarter and the amidst of a pretty challenging environment go to underlying the progress we're making on this strategy.
Sales were up sequentially quarter over quarter margins are up operating income is up net income is up and earnings per share are up versus prior year.
This progress cautiously Emboldens us as a team to continue the responsible investment and our strategy and acceleration of our plans.
Over the last few quarters I have talked about the investments, we're making including the release of new products, the increasing use of intelligence and controls and our devices and the investments of additional and commercial resources, along with the expansion of our vertical market focus.
And now in some cases, our vertical market focus is simply a matter of refreshing or adjusting our position and certain markets to accommodate for overall change.
And others, it's and expansion in our existing markets with new services or products, and yet and others of Ginger introduction of entirely new markets and.
And several of our established markets, we enjoy strong preference and brand awareness based on decades of experience and an understanding of the market needs and opportunities.
We work closely with our niche agents are general agents and distribution partners to understand not only of the customer's articulated need of request, but also the opportunity to see and develop solutions to address the unmet needs.
We were able to introduce forward looking thinking and improvements on design and specifications of the projects, which is and increases our value as a partner.
We add value throughout the use of different graphics materials sensors controls optics light cutoff and we improve the ease of installation of the performance of our products and such areas as uniformity and durability, all resulting in less maintenance longer operating life and lower overall cost of ownership. These.
Principal span across our solution sets, whether it's and lighting or graphics.
The commercial effort, we are investing in the <unk>.
And at around on qualifying our customer's goals, highlighting our strengths and focusing on those projects, where we can create competitive advantages.
Last year and non automotive vertical we designed a custom built large indoor fixture in partnership with one of the world's largest Japanese automakers.
The goal was to have a fixture it would properly highlight their product and showrooms across the country with the right color temperature intensity and uniformity and.
The project was not simply bid out, but instead, it was and engineered solution that leverage our unique capabilities, including design and manufacturing and.
Along with the network of partners across the country to assure proper application and installation.
And this case LSI worked with the customers and partner and not simply as a manufacturer of supplier.
Last quarter I mentioned, the contactless payment project with one of the world's largest oil retailers.
And this case, we helped design and deploy of payment option, allowing customers to pay the pump using a mobile application.
LSI worked with the customer and a team of their partners to print and QR code and and embedded near field chip into a series of graphics and then we manage the deployment and the installation and just over 11005 hundred locations.
These locations included anywhere from two to 16 plus pumps at each site.
The project was in the works for over a year, but the deployment was scheduled to be completed from start to finish and just over three and a half months.
I'm happy to say that we're more than 70% through this deployment and things are moving along well and.
In fact, just this week we were awarded another 1100 locations. In addition to the 11005 hundred locations on the initial projects back.
Last month, we issued a press release announcing our partnership as the official lighting partner of the USA Pickle ball.
Pickle ball is one of the largest growing sports and the United States and it's part of the sports industry, which includes tennis paddle of basketball and others.
And as the official lighting partner of the USA Pickle Ball of association will have much improved visibility to one of the fastest growing sports and the U S. The.
This partnership goes to underlying our strength and and offering and the sports CT market.
For decades, LSI has provided solutions to this market and with the refreshed product offering and this space and more to come and the future we see a real growth opportunity ahead of us.
This week, we issued a press release announcing that we were awarded of $20 million contract to provide indoor digital menu boards and systems to one of the world's largest fast food retailers.
This is a follow on order to the $100 million of water.
The announced last year and goes to further illustrate our ability to expand our share of wallet and our overall offering and a key vertical market we compete in.
These projects all good underlining the strength of our strategy and the opportunities in front of us.
Next week, we will be hosting our agent and partner meeting as well as LSI as national sales meeting.
And these meetings will occur virtually and as of today, we have over 500 agents and partners registered and planning to attend.
We'll be sure and roadmap of our plans for the future years, including the induction introduction of 25, plus new products and the upcoming quarters and the expansion of our existing vertical markets.
We are all glad to have a calendar year 2020 behind us employee and partner safety remains at the top of our list as we start calendar 'twenty year 'twenty one.
I'm proud of how the team at LSI has found a way to not just survive and the current environment, but also to thrive.
With that I will turn the call back over to Jim <unk> for a closer look at our financials.
Jim I'll start by highlighting key financial statistics for the fiscal second quarter.
Sales were 76 million, increasing 9% sequentially from Q1 and below prior year as projected.
Net income was $2 2 million compared to income of $1 7 million last year non.
Non-GAAP or adjusted net income increased 47% to $2 5 million versus $1 7 million and the same period last year.
Earnings per diluted share were <unk>.
Versus seven and Q2 of fiscal 2020, and non-GAAP earnings per diluted share were <unk>.
Versus <unk> <unk> per share last year.
Adjusted EBITDA was $5 1 million or six 7% of sales 130 basis points above prior year.
The company generated $5 3 million of free cash flow and the quarter, increasing our cash balance to $13 6 million as we exit fiscal Q2.
The company maintains and existing credit facility of $75 million and continues to have no long term debt.
We continue to effectively manage working capital and the face of constantly changing market conditions due to COVID-19 with noncash working capital decreased both sequentially and to prior year.
This also reflects our capability of managing the new product introduction process launching new products, while concurrently phasing out existing lines and minimizing duplicate inventory and obsolescence exposure.
New product activity was very active and Q2 with five new products introduced and we will continue to accelerate throughout the second half of the fiscal year.
This includes the key expansion of our outdoor portfolio and the next generation of several indoor product groups.
Our regular cash dividend of <unk> <unk> per share was declared payable February 9th for shareholders of record on February one.
Now I'll briefly comment on segment operating performance.
As mentioned sales and increased 9% sequentially from Q1 with the graphics segment, increasing 27%.
While the lighting segment more impacted by the resurgence of Covid was flat to the prior quarter.
The graphics increase was driven by the petroleum and grocery verticals, including the petroleum 11000 and site contactless payment project and project activity for several large grocery firms.
The development work on potential new programs remains very active.
And lighting project quotation activity remains favorable realizing quote and inquiry levels above prior year throughout the quarter, including improved activity and several of our key verticals, including automotive but.
But we also observed the quote to order conversion period, lengthening, indicating the industry challenge and managing project planning and scheduling.
The business gross margin rate improved 160 basis points versus prior year with multiple factors contributing.
Price mix was favorable reflecting the ongoing focus on higher value applications and solutions.
Productivity continues to be a major contributor as we align our manufacturing cost to market requirements.
Design savings of a sizeable part of productivity as we identify ways to engineer costs out of our product, while improving features and ease of contractor use.
Both segments generated improved gross margins compared the prior year.
With graphics, improving 280 basis points and lighting 140 basis points the law.
Lighting gross margin rate again finished above 30%.
Q2, operating expenses declined 7% versus prior year, reflecting our strong focus on priority.
Which includes investment in key commercial initiatives, notably sales resources and targeted marketing programs.
Balanced with ongoing identification of cost savings and leverage.
Looking forward to the second half of the fiscal year, we are encouraged with improving trends and market activity and the impact of our commercial initiatives can generate.
But we also recognize that market conditions may remain inconsistent and the near term.
Therefore, we will continue to balance our diligent focus on execution with investing in initiatives to generate growth.
I will now return the call back to the moderator.
Thank you, ladies and gentlemen at this time and we will begin by asking a question and answer session. If you'd like to ask the question you May Press star one on your telephone keypad accounts.
And from maintain total of indicate your line is and the question queue. You May Press Star two and if you would like for them moving a question from the Q4 of participants using speaker equipment and may be necessary to pick up your handset before pressing the star of our first question comes from the line of Craig Irwin with Roth Capital. Please proceed with your question.
Good morning. This is Andrew on for Craig I, just want to say congrats on the quarter.
Great start to 2021 and.
And my first question is about margins and you guys have exhibited strong margins this quarter and both segments and with the strong year over year increase can you guys just comment on the sustainability of margins at these levels and then just the.
Dynamics in each segment.
Yeah, Andrew Good morning, Thank you.
Greg we miss them.
We've been very focused on our margin improvement to a quarter.
Quarter over quarter, we talk about it we believe we still have room to.
To work with and margins are there we are affecting it through a number of programs it's not just.
The cost out initiatives.
Aligning ourselves with the right markets and the right mix.
Capitalizing on the strength that we have and it's.
Working with customers that respect the.
The products, we are delivering the solutions, we are delivering as opposed to getting into the the bid environments and things like that and so I think it's the culmination of all of those efforts and.
Think that we still have room to run there.
We may not.
See quite the ramp up of improvement from where we are.
Right now going forward that we have seen in the past, but we still think we can continue to turn that wheel.
Great. Thank you that was very helpful and one quick follow up can you guys just provide some insights and what youre seeing and the March quarter.
Specifically with the seasonality and then just also any commentary on a quote rate levels. I know you guys said they were increasing the past few quarters.
I'm curious if this is continued.
Our past few months I apologize.
Right.
The activity has definitely picked up we have also noticed a kind of of lengthening and between quote to conversion meaning.
The.
I think that there is pent up demand and there is some release relative to projects and people are getting the quotes and refreshing quotes.
And we were waiting for those to convert to orders.
But we did we've definitely seen a little expansion and that quote to conversion time, but the good news also is we're seeing a very good uptake and the customers that do end up quoting with us the number of that actually convert to orders. So that's been very positive of generally as you saw.
As you saw on the release this morning.
Q1 over Q2 over Q1, we had sequential improvement.
We expect that to remain in Q3, so we're looking for improvement in Q3 over Q2.
How March ends up breaking out I can't tell you right now, but based on our quote activity and based on the projects, we see on the chalkboard and so to speak we're very encouraged about our robust March we did not.
Because of our.
Quote to order to shipment cycle, we didn't see a lot of impact from Covid in March of last year.
Minus our distribution business Atlas did feel it a little bit quicker.
We believe that even though we didn't feel a lot of impact we should do very well on a year over year comparative.
Coming into the coming into Q3 and into March.
Great well, thank you for taking my questions and once again congratulations on the strong results.
Thank you Andrew.
As a reminder, and of Star one to ask the question. Our next question comes from the line of Sameer Joshi with H C. Wainwright. Please proceed with your question.
Yeah. Thanks, Thanks for taking my questions and congratulations on the nice quarter.
My first question.
We understand the COVID-19 could be a headwind.
The next few quarters so.
And the cadence of the revenues and.
On upward trajectory for the next two quarters.
And especially given the seasonal performance last year.
Well, we always have some seasonality and I think that.
We're seeing some <unk>.
Activities it may be out of season, so to speak where things are.
Orders or projects that had been delayed they are coming.
Theyre coming in the third quarter, where typically they would have come in and in the second quarter or may be deferred to the fourth quarter.
So that's very encouraging for us the way we are looking at the third quarter and then the fourth quarter, if we get back into the seasonality plus mixing it with the pent up demand, we could see a very strong fourth quarter and there is certainly some early indicators, particularly around the quote activity that that's very possible that could happen.
And is this the from the like what segment of the from the Nike segment of it.
But these times to shrink or is that from petroleum graphics that kind of from them.
And it is chiefly from the lighting side of things and petroleum definitely does the graphic side, particularly and the petroleum side does have a reset in the month of January and February typically and Thats all planned and that's all baked into our plans.
But we think that as we talk about that quote to order cycle.
We believe theres two things that are going to affect that.
They are both oriented around lighting.
And so we're we're hoping to see a better third quarter than we would see from a seasonality standpoint, and then the second is on our graphics from digital and Burger King specifically, they've really ramped up the speed to meet with.
Some.
Project timing that they want to make sure that they get in.
So on the digital side, we definitely see.
Some opportunity there and the third quarter.
So just stepping back on the.
Larger macro scale on 11.
And do you expect.
The benefit from a more than adequate supply of months from.
The infrastructure spending and capital expense with expenditure and supply company.
But we've been definitely been paying attention to a lot of the orientation and a lot of the discussion, particularly from the incoming administration about investments and infrastructure.
From a lighting standpoint, we play very solidly in that and could be a benefactor of that I think that some of that is we're starting to see some of that in terms of.
The quotes that are coming in and the project activity that is being looked at but it is still a little early to tell how that's going on.
All shake out right now.
And on whole it's important to the.
And just remember that we do have stops and starts that we're still dealing with.
We have supply chain.
Challenges, where COVID-19 is affecting them or things like that so.
We remain very bullish, but theres a lot of there's a lot of pieces to this whole puzzle.
Understood.
You have spoken about the.
Then booths and.
Ladies and.
And scores.
Do you have the sense of timeline.
And then what is it already done can you give us some color on that.
And I'm, sorry, you cut out just slightly and the beginning part and I Miss Jim did you give the.
And at the same source.
Our sales force increase okay Im sorry.
And the question was have we started that yet where we're at all where we're on it.
And completely cut out on my side.
Yes, so we have we talked about it over the last few quarters, we are certainly making investment and our commercial activities that is from a marketing standpoint, you saw.
Our announcement about our partnership with Pickle ball and it goes right along in lines. When we were talking about our vertical market development from a true commercial standpoint talking sales resources on the street right now we're targeting of 10%.
<unk> and we're probably 80% through that in terms of actually getting folks on board.
There is some ramp up time.
To that you bring on of new resource, we've got and get them trained up and get them specific too.
Knowledge specific to our company.
We've also added some resources that are being.
Qualified directly under the commercial side, but on our services business.
And which we referenced quite a bit with the rollout of the contactless payment and also with other the digital menu boards and systems that we're rolling out our services side of the business has experienced a pretty good growth and we are investing some resources there too and there again, we're kind of.
80%, 90% of our planned investment, but we're continuing to we watched this real time live and as long as the opportunities of there will continue to make those investments and expand those resources. We don't have any constraints of our cap relative to what we're willing to invest in.
If we can show the return.
Understood.
And just one clarification on the cost side.
You mentioned that.
Continuing to cost out of.
The cost and genuine costs out are you on.
And so doing any cost controls at the operating level.
Sure.
And of course, the spending on sales but.
But any other efficiencies that it will.
The good items.
Yes, I mean, I think the number one from a cost control standpoint, and I think we have.
A very good team of people here the recognize you know.
And what investment and return looks like.
We don't have systems that are and flexible.
We're always looking for opportunities and we will always kind of invest ahead of the curve.
<unk>.
Put anything at risk or it creates an opportunity or anything like that.
We do believe that there are still some opportunities and this comes back to the margin thing.
But we do believe we still have we have turns on the wheel here that we can continue to implement.
It's just a matter of doing it that doesn't disrupt any commitments that we have to our customers or things like that.
But the answer is yes, we do believe we still have some opportunity.
Got it.
Thanks for the color and thanks for taking my question.
And thank you.
Our next question comes from the line of Jed <unk> with Canaccord Genuity. Please proceed with your question.
Hey, Thanks, I joined a little bit late so I apologize in advance of you've already addressed this but I was wondering if you think through some of the changes.
And sort of large scale, so youre seeing.
Further pressure on on sort of the petroleum.
The market segment, which are strong and.
And and some of the auto in terms of or maybe or maybe you're not are you. So I guess first question are you seeing pressure kind of equally spread across end markets for lighting between.
Sure.
The quick stop and service station and automotive.
Well from the.
So in terms of the petroleum retailers, we've seen of continued investment from those folks.
Yeah.
They are not easily disrupted their plans are usually well thought out there and put out.
Ahead of them in terms of years.
And we didn't have much of the disruption in terms of their commitment.
During this whole COVID-19 side of things frankly, the challenges we're just.
Electrical permits construction permits inspections things like that from a timing perspective.
And we anticipate it to continue to be relatively strong and I think that you know.
Some of the oil retailers have been talking about.
Their activities and the things that <unk> been doing the control of their costs and investment cycles and things like that and they remain fairly committed on the automotive.
We I'll just make a point to say on the on the last day of the year, we had a very large commitment.
From a customer.
And then on the first day of our calendar of the calendar year. We had another so we look at it from the outside like like many would probably say the buying cycles of change.
We are buying more online and theres less going on and the showroom.
But we're also seeing some of our some of the larger automotive customers, taking advantage of the downtime and the showrooms and and a lot and making investments right now maybe preparatory type of things being ready.
The.
Covid kind of gets under control if you will so.
<unk>.
We're seeing pretty steady activity it would be the answered yet.
Yes.
Yes go ahead, and I was just going to add to that back to the to the Petro side. As you know those are generally very large multiyear programs.
And so they go through various phases of the cycle, but it's important to note we watch the potential.
The development work on few potential future programs and closely.
And that the development work pipeline right now remains very strong.
These of the programs and that would start affecting us and maybe in the later calendar year. This year and then on through the next couple of years. So we have both the current programs that we monitor our activity on the future development programs very very closely.
Gotcha so.
It's a little counterintuitive, but it seems like headline.
The headline there is a lot of headline risk, but the actual activity and the market is.
It seems much stronger on the auto side Covid and the feedback. We're getting is is COVID-19 is actually a positive for auto sales because nobody's, taking public transportation and anymore and most retailers have seen that fee and an increase of that kind of makes sense.
One last question for you just on the.
On the lighting.
And maybe for commercial.
Have you seen of change over the past.
A couple of years in terms of the influence of the <unk>.
Spectral tuning or the ability to to tune on Prem.
With the with the light or is it still mostly static.
I think theres a lot of conversation about it.
Whole concept of selectable color temperatures and things like that has definitely taken hold.
It allows our customers our installers and such to it allows us to reduce inventory and skewed.
SKU diversity of proliferation of name of alumina and same with alumina output.
But spectral is kind of it's complicated because it starts with the lead and it is impacted by the lending that you are putting on it and that may be that may not be something that.
We kind of get any time soon but it is certainly something thats talked about but I don't expect to see it rolling out into the field anytime soon and it's just the the cost for that flexibility is too high.
And it got it.
Got it thanks, guys I appreciate it Jed.
Thank you.
There are no further questions and the queue I'd like to hand, the call back to Mr. Clarke for closing remarks.
I just wanted to say thank you again for everybody the tuned and we're happy.
With the quarter of the way. It has developed we're I think we're coming into the new calendar year with a certain degree of momentum and.
We're looking forward to trying to keep up that momentum and.
And capitalize on it.
I just wanted to say thank you again for calling in and we'll look forward to talking to you soon take care.
Ladies and gentlemen, and this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have on <unk>.
Wonderful day.