Q3 2021 LSI Industries Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to LSI industries fiscal third quarter 2021 conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator <expletive>istance. Please press star zero on your telephone keypad, It's now my pleasure.
To introduce your host Mr. Jim Joyce. Thank you you may begin.
Good morning, everyone and thank you for joining we issued a press release before the market opened this morning detailing our fiscal third 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 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 third quarter GAAP and non-GAAP results is contained in our press release and 10-Q.
Please note that managements commentary and responses to today's questions on the 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 third quarter results. After 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.
Thanks, Jim and good morning, all thank you for joining us on today's call.
Let me start by saying I'm very pleased with the continued progress of the LSI team and what still seems to be very uncertain market conditions COVID-19.
Covid and its restrictions continue to decrease on a daily basis. However, its effects on project timing labor and supply chains are all still very present.
Despite these challenges I'm happy to report that we experienced positive year over year growth in net sales for the quarter and prior year.
In addition, gross margin adjusted net income operating cash flow and adjusted EBITDA, all improved compared to last year.
Typically our third quarter is our slowest quarter as weather conditions across the country affect our outdoor installation activities.
Starting out in January and into the first part of February conditions were a bit sluggish. However, we experienced an exponential increase in sales and order activity in the second half of the quarter and I fully expect this momentum to continue into the fourth quarter.
Although lighting sales were down approximately 7% when compared to the prior year. Our quote levels continue to increase measurably in the sales GAAP versus prior year continues to narrow with sequential improvements each quarter.
Lighting segment adjusted gross margins for the quarter were 31% showing a 530 basis point improvement over prior year with adjusted operating income for lighting more than tripled prior year levels in the third quarter.
The introduction of more than 20, new LSI lighting products throughout the year have allowed our agent partners and sales team to offer multiple solutions and price points, while increasing our close rates margins and profitability.
As I spoke of last quarter, we've been focusing on our sales force and sales force effectiveness as.
As part of this study are sales leader Pablo Galena has spent most of the quarter executing a reorganization of our national accounts team in an effort to develop more organic sales leads and opportunities for our agents our partners and our company.
Early results are very encouraging and we will continue to focus on creating more value from our direct sales force efforts.
Turning to our stock and flow business Atlas introduces an entirely new product line in March called origin. This.
This product allowed line allows them to have multiple price points in the market.
Origin will continue to rollout over Q4, but it will allow us to capture more of the value segment of the market. We're very excited about this.
In addition, I would also like to mention that Atlas introduces an entirely new product category called the wall pack witness in Q3.
This product takes a traditional Atlas wall pack and Embeds, a security camera into the unit, allowing customers the ability to review activity through a phone or tablet application offer a price point only slightly higher than the original cl<expletive>ic wall pack product line.
On the graphics front sales increased by more than 20% versus Q3 of last year.
Our digital graphic programs continue to gain momentum with a growing list of customers and our project with one of the world's largest <unk> companies continues to be on track and delivering excellent results to the customer and to LSI.
We expect that this project will continue its current pace for at least the next 12 months at which point, we plan to transition to the already committed indoor phase I.
I expect that overall this project will extend well into calendar year 'twenty 'twenty three.
As I noted in our press release, we've also been working on a new secured digital kiosk solution for a nationwide pharmacy retailer. In addition to prototyping a number of possible solutions for the growing grocery store segment of pickup and delivery.
Switching gears petroleum graphics continues to remain strong with activity now expanding in Mexico as COVID-19 restrictions ease.
Group did experience a bit of a challenge last quarter as we lost six workdays.
Texas, Snow storm, and resulting power outages.
No orders were lost but rescheduling and timing has put pressure on the entire graphics team to make up for lost ground.
Lastly, I'd like to mention our adapt group.
This is the group that handles our installation and project management and they've been key to our expansion in integrated lighting and graphics projects.
Adapt continues to grow in both its capabilities and importance in LSI is value proposition.
Fiscal year to date revenue has increased almost 50% when compared to last year.
In the last quarter alone, we engaged in several new projects, including a site <expletive>essment project for one of the world's largest convenience store chains.
If this project continues to develop as we expect it will it will create significant opportunity for Alastair I well into the future.
Overall I'm pleased with our results in the third quarter and I'm confident that we will continue to execute in the fourth quarter.
We are working well as a team and continuing to look for organic growth and M&A opportunities.
I know these efforts will benefit our employees customers and shareholders alike.
With that I will turn it back over to Jim <unk> for a deeper look at our financial performance for the quarter.
Jim.
Thank you Jim and good morning, everyone.
I'll start by highlighting key financial statistics for the fiscal third quarter, and then provide additional comments on segment performance.
Net sales were $72 million for the quarter growth of 2% over prior year.
Net income was $1 5 million compared to income of $1 9 million last year.
It is important to note that the third quarter last year included a nonrecurring pretax gain of $3 7 million, resulting from the sale of the North Canton, Ohio facility non.
Non-GAAP or adjusted net income was $1 8 million versus a loss of $1 1 million in the prior year.
Earnings per diluted share were <unk> <unk>.
Versus seven in the prior year quarter.
And non-GAAP earnings per diluted share were seven.
First is a loss of <unk> <unk> per share last year.
Adjusted EBITDA was $4 4 million compared to $1 6 million in the prior year.
The company generated $10 6 million of free cash flow in the quarter or more than 230% of adjusted EBITDA, increasing our cash balance to $23 5 million as we exit fiscal Q3.
Also in the quarter, we extended the maturity of our revolving credit facility from March 2022 to March 2026, and increased total total borrowing availability by 25 million to $100 million.
We believe our current liquidity and access to capital will allow us to fund our current operations as well as our growth objectives, both organic and inorganic.
The company had no long term debt at the end of the quarter.
Our regular cash dividend of <unk> <unk> per share was declared payable may 11th for shareholders of record on May three.
Shifting to segment operating performance Q3 was a quarter of fluctuating market conditions for both segments driven by the lingering effects of COVID-19 and adverse weather conditions and despite the disruptions both segments reported increased adjusted operating income versus prior year.
Project quotation activity took a stair step increase in March contributing to a book to bill ratio appreciably above one for the quarter.
The quotation and order activity were broad based across multiple market verticals geographic regions of the country and products.
Specific to the graphics segment sales increased 20% in Q3, driven by our digital solutions business, notably the $100 million program in the <unk> vertical.
As mentioned sales in our petroleum C store vertical were adversely impacted in the quarter as inclement weather resulted in loss production at our Houston, Texas facility.
We were successful in securing a new petroleum program in the quarter, which involves running at renovating customer locations at military basis throughout the country.
Our program backlog within this vertical remains strong.
As our design requests for potential new programs.
We continue to see increasing renovation opportunities in the grocery vertical with customers focusing on higher end features and finishes throughout the store interior and our commercial team working to identify new ways to expand our share of business in this vertical.
For lighting sales continue to recover from the pandemic as the sales GAAP versus prior year continued to narrow.
Lighting generated a positive book to Bill ratio in Q3, and we're encouraged to see project quotation levels coming back in select regions of the country, where construction has been severely restricted over the last 12 months.
We're also beginning to see larger project opportunities, which decreased significantly during the pandemic.
Key indicators such as the Abi architectural billings index continued to improve.
Lighting gross margin rate was 31% for Q3 530 basis points above prior year, increasing the fiscal year to day rate improvement to 310 basis points.
We continue to focus on all components of gross margin for this reason multiple factors are contributing to the improvement, including higher value applications pricing new products designed savings on existing products quality and manufacturing productivity.
As Jim mentioned adjusted operating income for lighting was more than triple last year.
We have been successful to date and managing global supply chain challenges and continue to quickly adjust to changing conditions.
Because of our planning and actions, including additional inventory of 6 million since Q1, we expect minimal disruption as we manage through the fourth quarter.
Inflation continues to spread across select commodities and services as a result, LSI recently announced additional price changes to various product categories.
We expect to offset these costs in both segments through a combination of price management and product cost reduction actions.
Moving forward, we intend to continue the trend of gross margin rate expansion.
I'll now return the call back to the moderator.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad accounts.
<unk> total indicate your line your question Kim.
Press Star two if you'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
I'll, let please only call for questions.
Our first question comes from the line of Craig Irwin with Roth Capital Partners. Please proceed with your question.
Good morning, and thanks for taking my questions.
So the first thing I wanted to ask about is is revenue progression sequential revenue progression. So.
This past 18 months has been highly unusual.
For every one.
And you guys are making solid progress with the growth year over year now.
Typically the fourth channel the fourth fiscal quarter and the.
June quarter.
Revenue is up quite nicely sequentially.
Should we count on similar seasonality for LSI image, Inc. Quarter, do you expect a material increase quarter over quarter and is the right comp not really.
For 'twenty, but maybe four to 19 of 14 to 18.
It's as we reach back to some of the historic performance.
Oh, Craig This is Jim Clark good morning, and thanks for joining.
So we're looking at the fourth quarter, it's kind of a there.
There is some pressure the external pressure if you will theres two things that we're looking at one is a labor issue external to LSI, meaning.
We export as we sell our products and ship them out we are hearing from a number of our customers a number of the projects that are going on that labor to get the installations done you know all through the entire construction chain is struggling so we're not quite sure what that impact is going to be but.
We do think there could be some pressure in terms of what actually ends up getting deployed are installed in the fourth quarter.
As a matter of course of business here within our business, we are anchoring everything.
All our reports all our reviews have the 19 numbers right next to the 'twenty numbers in the 'twenty, one so that nobody gets distracted relative to some m<expletive>ive improvement.
Because of the Covid effect.
But we do we are we are aware of the this labor issue out in the in the general construction market and we're also aware of kind of materials inflation issue out in the market and it's not just the pricing side its availability and construction materials. So.
So we as we were coming out of Covid, we're very well.
We're very positive about that were very enthusiastic about that but we're seeing these other issues that are hanging on that maybe haven't been fully resolved again outside the walls of LSI.
But we're aware of them.
Okay great.
Craig Jim beliefs here, let me just.
Our support Jim Jim's comments, we're very encouraged by the continuing increase in market activity.
It is going on.
As we commented in our in our remarks.
Our quotation levels in our orders our book to Bill we feel very good about it is just very difficult to hone in on a on a specific number at this point in time give them what Jim Jim mentioned.
We do feel very good about the overall direction and your point about fiscal.
Fiscal year, 'twenty Q4, being the the appropriate.
Benchmark Youre right its really not we will see a stair step improvement from from that level given the.
Opening up of the.
The construction industry and so forth.
But the level of which is what everyone not just ourselves as to try to hone in on.
Understood understood. So you know continued moderate progress.
And.
Within the constraints of.
The broader environment as that is that a good way to talk to power price.
I think that's very well said and I will.
Mentioned in the call in our press release, our quote activity has picked up measurably, but one thing we have noticed and now we've got kind of a you know.
A broader longer view of it is our conversion timing. So the quotes come in and we had a certain conversion timing, we could say if a quote came in generally X percentage of that 70% of those would turn into orders and 60% of those turn into orders within 60 days or something around those lines what were seeing.
As an extension of that conversion of quotes don't get lost they get re quoted to account for materials inflation and things like that but the conversion rate from the initial quote to close all.
All of those things are still seem to be in flux and what we're seeing is better visibility to the whole construction chain, that's where those changes are where the where the where the delays are happening.
Understood understood.
My next question is really about components chips drivers from balanced right.
There's a lot of conversation out there about shortages in different areas of the semiconductor market can you maybe talk to us how confident you are about the availability of sufficient components for.
For the next number of months is this something where you could potentially be impacted do you do you have contingency plans.
Already in place if if one supplier of short can you just maybe.
Worked this out for us and help us understand what you said.
Yeah, absolutely. So first of all I'll, just say, we're not immune to anything but.
Any of these challenges that are out there in transportation as the other element in there.
Which is a wildcard, but I think it was.
As we've discussed over the last few quarters over the last year and a half we purposely said that set out two years ago to diversify our supply chain.
We tried to do there were three elements that we were focused on one was diversity to prevent any single point of failure. The other was diversity in terms of competitiveness and the last was this concept of on seeing how much we could onshore or sourcing.
We're not completely onshore relative to the U S sourcing, but through those exercises we diversified our supply chain a lot. So I think we have a water redundancy and contingency built into it and at this point, we're not we don't anticipate any significant issues.
Yeah, Craig just let me add Jim <unk> here that we consciously made the decision.
Over the last quarter plus to increase inventory levels for this very reason.
Particularly on some of the longer lead time components and so forth. So while it is a daily battle per se our teams, Mike Beck and the operations team, Brian Vincent and procurement and supply chain teams have done an excellent job of navigating through this and as Jim said we've had.
Minimal effects on the business and we anticipate no major effects from the business throughout Q4 and moving forward.
Understood understood.
That makes sense.
And then operationally I just wanted to maybe understand a little bit better that the margin progression. You know seasonality is your March quarter is down from your December quarter. So there tends to be some headwinds from there but can you maybe talk about this this moderate you know 70 plus.
Basis points any margin compression was this really just driven by revenue coverage or maybe didn't mix moving against you and how do you expect margins to play out in the in the fourth quarter should we see an improvement just sort of a recent performance is there an opportunity to maybe exceed that or the <unk>.
Margin space moderate headwinds given that the transportation and other expenses that are popping up.
Well you know Theres a lot of things, where I think you just hit the nail on the head there is a lot of elements, where kind of battling overall Q3 tends to be.
A little bit more pressure on margin, mostly because of that mix element, where we get little less outdoor a little bit more indoor or outdoor projects, particularly in the northeast in any places that are affected by weather or come under pressure, but.
We have been.
We've been stable in what we're doing from a pricing with our partners our agents our customers, but we've also been fair relative to whatever our input costs are.
We do buy ahead, we as Jim just mentioned, we purposely made some decisions to up some of our inventories on components and things like that as you know, we're still a build to order shop, but getting those pieces and being able to be ready is important.
You know I think that.
Given any external factors our margin will remain stable or will continue to move up as we've done over the last few quarters.
The third quarter is always our most pressured quarter so in totality.
I don't have any heartburn about our performance for Q3.
No. It was strong relative to a <unk> 19, I mean very strong so.
And you know it's.
Strength in 'twenty I guess with.
Different world.
Right physical attacks.
Yeah.
So.
Congratulations I should say on the on the new petroleum customer win that that's really healthy that that's good to hear can you maybe frame out for us what this customer looks like from a financial opportunity for LSI, even though.
Locations and potential content per location.
And are there others in the pipeline do you think you can potentially wind over the next year.
Number of months.
Well, Craig as you know because you know you've been covering us for a long time. These petroleum customers. It is one of our major customers that we've been doing business with for a while but they accelerated the pace.
Frankly it was.
It's a group of military based installations.
And <unk>.
<unk> been in the past may be segmented some of that business and so it's a new win for us, but it's all part of that continuing kind of refresh cycle that we talk about so often.
I will mention the I didn't mention it before but I'll mention it right now because we were able to confirm it yesterday.
But we are pretty excited about something that happened in petroleum, where we have a customer where we're fully engaging in a solar installation and.
They've selected us to be kind of the lead on that.
We look at it as something that could really be expensive for us as we move forward and the big thing being that.
There's two things there's two elements, we're looking at in terms of value to the customer and the way. We're playing one is just the whole this transition carbon offset being a better being a better constituent.
In terms of supplier in AR.
Our presence here in the U S. The second being that there's a number of places where.
We're able to use solar as emergency power.
And I think that they are grasping onto that concept right now so we're going through.
Confirmed.
Installation it will take us a better part of six months to get all the permitting and work that we need to do in the background.
But I did want to mention that I wasn't able to mention it before because we werent able to confirm it until yesterday, but that is something we're really excited about on the patrol.
Great well congratulations on the progress.
Good luck for the summer selling season.
Thank you Greg take care.
Thank you. Our next question comes from the line of from Amit Dayal with H C. Wainwright. Please proceed with your question.
Thank you. Good luck guys. Thank you for taking my questions.
With respect to the graphics segment, you pointed out you know and the opportunity with the pharmacy chain is this similar in size potentially do you know what are you doing with the U S are the 100 million dollar level opportunity or is it maybe a little smaller or any color on that.
Thank you.
Yeah. Good morning, Amit Thanks for the question.
I'd be hesitant to comment on the size right now we're really in a multiple prototype stage, so depending on which direction. They ultimately ended up going on will really determine the size of the project and their deployment schedule I think we're going to need another quarter or so.
We're able to answer that question with confidence however, I will say that based on preliminary.
Yeah.
Discussions are.
I don't know if it would quite reached $100 million, Mark, but I think it could be significant.
It is early it is early to forecast on that.
Okay. Okay.
With respect to the U S. Our project how much of that has been delivered.
Oh.
I would say that if I would just put it in percentage, we're still where we're in the we're just.
Coming up to the 50% Mark right now we've got.
We've got a full year left.
We will be fully engaged in that through our entire fiscal 'twenty two and we've got a second follow on which is the indoor aspect of that that will follow in 'twenty three our fiscal 'twenty three but.
We will certainly continue to be engaged in this until into calendar year 'twenty three.
And I would say Amit I'll also say that our deployment schedule will remain fairly consistent.
As we're looking at it right now for at least the next 12 months.
Okay understood.
You faced any sort of neighborhood challenges in this last quarter or is it something that you are anticipating that might become bigger.
Does that are starting to see if there was any impact to potential deployments because of those issues already or is this something that maybe coming down in the future.
Yeah, well I'll break that into two pieces is that kind of internal day, LSI and external to LSI. The external we just talked about with Craig's question and it's really through that whole construction.
Chain.
Out in the field so to speak.
Within LSI, we're not immune to the environment right now that's going on.
Our business.
Any any surges and things like that.
Acquire us to add labor. It is a challenge there's no question about it now with that said.
We sat down with the operations team and our human resources team over four months ago, and they put together some pretty innovative plans to be able to make sure. We can staff up for it and we've tested it in limited.
Limited testing and we're continuing to expand that but.
But.
It certainly could hit us, but I believe that we have some plans in place that would mitigate that risk significantly.
Understood.
The sales re org that is taking place in that just from the lighting segment or is it also the graphics segment.
It's mostly focused on the lighting segment.
If you looked at the history of things that we've done on the commercial side, we sat down on the.
The graphic side was one of the first things we did because it was part of that whole reorganization, where we consolidated the operations up in Akron Canton and created.
Much stronger continuity between our Houston operation and our Akron operation and is part of that we were able to look at the commercial side.
Back then, let's say 18 months ago 12 months ago.
So most of the reorganization that Pablo is leading right now is really <expletive>ociated with lighting and I think it's the area. We have the greatest opportunity in right now.
Understood from our commercial our commercial reorganization perspective.
Okay. Okay.
You you highlighted maybe.
Some further improvements coming on the gross margin from.
How much more room is there with your current sort of a setup.
Improved margins.
Well, if we were operating in a vacuum relative to you know.
Commodity pricing and materials pricing and shortages and transportation costs.
I think that we still had we still had some ways to go if you factor in all of these items that are happening in kind of real time I still think that we can we have the goals in place I meant to make sure that we are working towards those we have the kpis.
They push the teams and us as an organization to get there I believe that we can still continue to make incremental improvement, but we do have headwinds that are that are kind of offsetting some of our efforts I don't expect us to slide backwards in any regard.
But.
So much of what we're doing particularly as we come into this fourth quarter with the with things opening up and stuff is new to US I think it's new they're all businesses that are facing this.
This re emergence from Covid so.
The short answer is that I think we still have some room, but we certainly have some challenges.
Amit let Jim go lease here, let me just add is as you know our goal is double digit EBITDA and.
We're on a nice path of progression to attaining that and certainly.
Key element of that is going to be an ongoing improvement in our gross margin right now that's going to come from multiple multiple pieces volumes a component of that.
Our higher value content of our business is a piece of that and then of course all the all the operational elements. That's what's allowed us to achieve our margin expansion that we've that we've driven over the last 18 months or so and it's going to be those same variables with the volume component that's going to continue.
This allows us to to drive margin expansion moving forward.
Understood. Thank you guys. That's all I had appreciate it.
Thank you ladies and gentlemen at this time there are no further questions I would like to turn the floor back to management for closing comments.
This is Jim Clark I, just wanted to say thank you again for taking the time and the investment to to tune into our updates and find out what our company is doing as I mentioned in the press release I'm very happy with the results of the third quarter. The effort. The team has put in and I am very encouraged.
With the fourth quarter as we are.
As a country as we start to emerge from this COVID-19.
Pressures that we've been dealing with for the last year.
I just wanted to say thank you again, and we'll look forward to talking to you in the next quarter take care.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.