Q4 2021 LSI Industries Inc Earnings Call
Greetings and welcome to the LSI industries fiscal fourth quarter and full year 2021 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If you would like to ask a question. Please press star one on your telephone keypad.
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 to introduce your host Mr. Jim <unk> Chief Financial Officer. Thank you Sir Please go ahead.
Good morning, everyone and thank you for joining US we issued a press release before the market opened this morning detailing our fiscal fourth quarter and full fiscal year 2021 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.
Reconciliation of fourth quarter, GAAP and non-GAAP results is contained in our press release and 10-K.
Please note 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 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 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 <unk>, President and Chief Executive Officer, Jim Clark.
Thank you Jim Good morning, all and thank you for joining us on today's call as you know LSI as fiscal year runs July one through June 30th and as such will be discussing fourth quarter and full year 'twenty 'twenty result on todays call.
I'm proud to say that we finished the year with a strong fourth quarter and full year over year growth in a challenging environment.
Our fourth quarter net sales increased 53% versus prior year, 22% sequentially from Q42% organically.
Margins continue to improve and adjusted EPS rose to 12 cents versus seven cents in the prior year.
Jim <unk> will provide additional color on financial results in a minute.
In fiscal year 'twenty, one we turned the Covid challenge into an opportunity introducing more than 40, new or re engineered products across the business.
We introduced two new lighting lines opulent in LSI in origin at Atlas.
Both product lines represent new thinking in performance and design and they allow our reps agents and employees to be more competitive and differentiated while allowing our customers to benefit from the latest generation of sustainable and energy efficient lighting solutions.
In connection to our ongoing improvements in lighting fixtures LSI continues to innovate in our lighting controls area.
<unk> developed an affordable entry level control solution, just over a year ago and a.
Along with other third party partner solutions, they allow us to provide multiple configurations to meet various customer requirements.
Eighthly, improving the overall functionality and energy efficiency of our solutions.
We estimate that almost 40% of our projects now include some type of system control and that number will continue to grow.
On the graphics side now referred to as displayed solutions are continued engineering development introduced a new category of Q S. R. Visual display solutions, allowing for a single system on a chip approach that can be used across most of our projects. In addition to our external.
Graphics drivers products, we have traditionally used.
This system on a chip approach vastly simplifies the manufacturing process and reduces onsite serviceable components.
Creating a more modern flexible and energy efficient design.
Along with it despite solutions group is our latest acquisition J S I J.
J S. I provides display solutions in various markets with particular strength in the grocery vertical.
They design manufacture and deliver a variety of products from simple tabletop displays and cases to refrigerated solutions.
The refrigerated solutions use our highly efficient modular design, allowing a simple onsite service and energy efficient operation.
J S. All GSI is also leading the way in the development and use of next generation refrigerants that will help to create environmentally sustainable systems for our customers.
Lastly, I'd like to comment on or adapt business unit.
Adapt as our field services group and they represented deployment management team for our local and national customers. They serve as both large and small projects, including our petroleum C store vertical automotive grocery in Q S. Our customers among others.
This group continues to be an important asset to LSI, our reps agents and end use customers and they allow us to provide a single point of contact for a fully deployed system.
They manage and arrange onsite services, including everything from site surveys design work permitting and onsite contracting services, creating a single point of customer.
In fact, it's with this group along with our Houston operations has deployed a contactless payment system last fall for one of our largest petroleum customers.
We're responsible for coordinating the manufacture and design of the system graphics, along with the installation and enrollment of each individual pump at more than 11800 locations.
I'm proud to say that this project was completed safely at the height of the pandemic and deployed across the country and less than 100 days.
These stories and activities reflect the customer confidence in LSI, they demonstrate our commitment and our progress against an ongoing strategy that we developed two years back.
Our commitment is to provide world class service with highly efficient sustainable products and solutions. We provide these solutions to the broad market, but we have a focus on key vertical markets.
Boeing has to differentiate yourselves from commodity products, while expanding the value of the solutions we provide.
In fiscal year 2021, the LSI management team, along with an energized and committed workforce achieved year over year growth across both lighting and display solutions group or.
Our prior work and manufacturing efficiency supply chain resiliency engineering and sales allowed us to meet our order commitments and capture new business in a challenging environment.
I'm proud of the way our team and our company adapted to serve our customers and I want to take a moment to say thank you to the entire team for their efforts and more importantly, their contributions to our results.
In fiscal year 2022, we are setting our sights even higher.
We have used the last year to make continued progress against our strategic priorities and we enter 2022 with momentum.
Our backlog entering the new year is strong and our orders are up.
Our quote activity is the highest it's been since I joined the organization.
We are continuing our focus on higher margin opportunities focused on our key verticals are commercial and marketing efforts continue to improve and we have strong price discipline in a highly dynamic market.
We're engaged in a number of new exciting projects, including a rebranding effort.
Of our large southwest grocery chain, a number of automotive projects, our ongoing work in the Petro C store market.
And the new design and installation of a solar assisted gas station in C store in Texas.
Our acquisition of J S is off to a very strong start and I'm happy to say theyre, having the highest billing months in the history of the company.
Our commercial team has already begun the process of mapping out cross selling and joint customer opportunities.
Our operations team has implemented a cross factory LSI GSI manufacturing program to assist with a project for one of the world's largest E retailers and expanding grocer.
This is just the beginning and collectively the teams believe there are a number of areas. We can work collaboratively to improve the effectiveness and efficiency of the operation.
We are all excited by the opportunity ahead.
In summary, I'm pleased with our progress we have made in 2021 and I'm excited about 2022, we have delivered on our commitments to our employees our partners our customers and our investors. We have a high say do ratio underpinned by a solid strategy I'm confident in the position of our business moving forward.
And I'm looking forward to the journey ahead.
With that I'll turn the call back over to Jim <unk> for comments on our financial performance.
Thank you Jim I'll start by highlighting key financial statistics for the fourth quarter and full year fiscal 'twenty. One then provide additional comments on segment performance.
Net sales were $97 million for the quarter growth of 53% over prior year.
Excluding the five weeks from the GSI acquisition organic growth was 39% with both reportable segments generating significant growth.
Sequential organic growth from Q3 generated a stair step increase of 22%.
Q4, net income, which included pre tax acquisition related expenses of $2.9 million was 200000, while non-GAAP or adjusted net income was $3.3 million for the quarter an increase of 82%.
From $1.8 million last year.
Earnings per diluted share were one cent, including the impact of acquisition related expenses and non-GAAP earnings per diluted share were 12 cents compared to seven per share last year.
Adjusted EBITDA increased to $6.8 million from $4.6 million last year.
For fiscal year 2021.
Adjusted net income and adjusted earnings per share more than doubled the prior year. Adjusted net income was $9.8 million compared to $4.1 million in fiscal 'twenty and.
And adjusted earnings per share were <unk> 36 versus 15 cents for the prior year.
Performance improved steadily throughout the year as fiscal 'twenty, one sales finished 3% above prior year after starting with Q1 down 21% because of continued COVID-19 impact on our markets.
The company generated $2.7 million of free cash flow in Q4 impacted by increased inventory levels and $2.9 million of acquisition related charges, we purposely increased inventory to support accelerating sales as well as manage ongoing lengthening of supplier lead times.
So on key components and other supply chain disruptions.
During the fourth quarter, the company deployed 90 million toward the GSI acquisition, including $24 million of existing cash with the rest with the balance financed through the existing $100 million credit facility.
At the end of Q4, the company had $68 million in long term debt, resulting in a ratio of net debt to pro forma trailing 12 month adjusted EBITDA of approximately two and a half times.
LSI had availability of $32 million on its credit facility at quarter end.
Our regular cash dividend of <unk> <unk> per share was declared payable September 7th for shareholders of record on August 30th.
Shifting to segment performance both segments achieved substantial improvements in sales and operating income both sequentially from Q3 and to prior year.
Sales for the lighting segment increased 30% year over year in the quarter. A result of increased quote and order activity we've experienced over the last several months.
Sales increased both both across project business as well as sales through distributors stock distributor.
Distributor stock sales increased more than 50% compared to prior year, driven by increased current demand and improved distributor confidence to begin increasing stock levels after decreasing inventory levels throughout the last 15 months.
Construction indicators remain very favorable our quote levels remained strong and we enter fiscal 'twenty two with a considerably higher backlog.
We continue to align selling prices to changes in commodity input cost successfully maintaining margins are.
Our proactive approach to managing supply chain has not only minimize disruption, but combined with our U S based manufacturing allowed us to hold our lead times and maintain customer service levels.
For fiscal year 2021 lighting gross margin.
Gross margin rate improved 250 basis points generating increased operating income despite COVID-19 impacted lower sales.
As outlined in the press release, we have renamed the graphics segment to display solutions to more accurately describe the comprehensive offering the business combination provides.
Fourth quarter sales for our display solutions segment increased 93% versus prior year with organic growth of 54%.
Growth was led by our digital signage portfolio and the continuing benefit from our large <unk> program that remains in process.
The program was approximately 40% complete at the end of June and will continue throughout fiscal 'twenty, two and into fiscal 'twenty three.
We were successful in the quarter and winning additional store orders for our fast growing grocery chain in the southwest where we provide a broad range of display products.
In addition development activity on potential new programs remained strong working with over 10 customers across multiple verticals.
Initial cross selling opportunities with J S. I have been prioritized and we're confident this will lead to additional program activity later in fiscal 'twenty, two and in future years.
For the full year fiscal 2021 display solutions sales increased 27% with adjusted operating income increasing 69% to $10 million.
I will now turn the call back to the moderator.
Yeah.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
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First question is coming from Craig Irwin of Roth Capital. Please go ahead.
Hi, good morning, gentlemen, congratulations on that.
Really strong revenue this quarter.
When I look back in history.
It looks like if we strip off the the benefit.
The benefit of your acquisition this.
This is quite clearly.
Significantly above your highest fourth quarter in history. So congratulations.
Yeah. So thank you very much.
Really what's driving that I mean is this is this really you know the dam breaking everybody that had things that were going slower than than than they wanted during COVID-19.
Is this are you.
Is this a new product portfolio.
Can you help us understand why my revenue is doing so very well at this point.
Well Craig. Thanks. This is Jim Clark and thank you for calling in and thank you for the comment.
It's not one thing it's a combination of a number of things.
Certainly us being more competitive on the product side and the solution side being able to help and deployment and all those things have significantly.
Accelerated our sales.
Second thing is you know there is a there there wasn't is pent up demand a lot of projects. If you think about lighting in particular.
Lighting is towards the latter stages of the development of a of a building in the you know the installation phase and all of that so many of those projects.
We have been deployed over the last quarter were projects that were simply delayed because of COVID-19, but they were further along in their development cycle.
As we look at AIA, we see that the architectural index is way up you know up almost 60, you know on a relative scale of 50 being below 50 being negative and above 50 being positive or up around 60, which is a historical high it means a lot of activity in planning and that type of thing, but I was just looking at a door.
<unk> report.
Yesterday, it's also indicating that the delays in construction because of materials inflation and all of that.
Is it starting to be spotty. So you know L. S. I like unlike you know I mean, just like every other company out there where we're battling through these.
Pits and starts of Covid, but.
But I think we were very you know we had planned we were ready to execute and I think that we picked up a lot of customer interest because of our supply chain buy ahead, and having materials and having the workforce to be able to deploy it.
This was all part of our plan to be ready for this this last quarter and you know in the next quarter and I think we really benefited from it.
Got it that's really good to hear so Youre acquisition also seems to be starting off particularly strong right now.
Just south of $9 million.
In the five weeks or roughly five weeks.
Aimed at.
It seems like there is potential for.
You know execution above the numbers that we previously talked about can you maybe tell us what is this maybe just a post acquisition sort of.
Part of that of delivering some times that we see in.
In M&A transactions.
Or is it.
His business philosophy there.
Letting the same really strong fundamentals.
Oh, I would certainly underlying that it's the latter right. It is strong fundamentals, we see continued secular growth in the grocery store market.
I know that there were some comments occasionally that as Covid eased you know a lot of people would go back to our.
You know restaurant dining and things like that.
And what we've seen is the grocery stores really took an opportunity made it an opportunity not just on the on the tactical side, but on the strategic side to improve their service offering you know prepared meals.
Higher caliber of.
Selections available the display portion of that the graphics. The refrigerated cases, all of those become very important because it's a whole shopping experience that are going for and we think that we're really going to benefit from that J S side that you know it has a relatively.
You know long tail relative to a project and being quoted on a project and getting a product out one of the things we definitely benefited from was.
The world's largest E Taylor.
No.
In.
Emerging grocer had a large order in we were actually able to kind of accelerate a bunch of that by using some of J S is manufacture ellisize manufacturing resources to support J S. I, so that really worked out well and I think theres a piece of that in that accelerated number that we got in that stub period. It was.
Because of that collaboration as we look at the business first of all fundamentally it's a very strong business run by a great management team up there. They are energized they are committed to being here. They are excited to be part of LSI as opposed to being another financial ownership or something like that.
That number one is probably the most important thing, but number two I think the LSI as demonstrated in the last couple of years from operational improvements and things that we've been able to do there we feel like theres a lot of that opportunity up at GSI as well and so does the GSI team. So you know getting the teams together, which we've worked on over.
The last you know.
Few weeks couple of months. If you will there is we've already started to line up projects, where we think we can help.
One of those was I'll just circle back around to it one of those was the assembly of some of these products for the world's largest E Taylor and it.
It really worked out well so we're very happy with that with this acquisition, we think that it fit in exceptionally well in our strategic plan grocery.
Sure and the.
The evolution of the expansion into the C store environment with GSI. It was part of our investment thesis, it's worked out very well so far and.
We're just excited about it.
And they've done an exceptional job. So we were very happy with their performance in those five weeks.
Thank you for that.
So the one the one thing that maybe you didn't move your direction. This quarter what was the gross margins I understand when you consolidate a new patient there's always increased costs.
And.
Yeah.
Positioning of materials adjustments made to manufacturing.
Can you talk us through the sequential gross margin progression.
Was this sort of a temporary blip here as.
As you completed the acquisition of it dealt with some of these these large orders coming through or is this.
Similar to what we should expect going forward.
Yeah, I mean, I think there were three things that got us there.
Account for that number one like you said during the acquisition, we havent recognized any of the benefits and we took resources and time and everything to go through the acquisition and it's not just the day, we close in the days after but it was the leading up to it. So that's number one number two was just general mix right. We had this.
Pent up demand and things like that but our mix wasn't optimal but it was strong but it you know our mix accounted for a little bit of that and number three I'll just be candid we've been very very careful.
Careful about watching price inflation, but we made a strategic decision along the lines there to protect our agents and protect the projects that they had we got we you know we took.
We took some margin erosion purposely.
As opposed to potentially disrupting some of the projects we had in some of the quotes we had out there we couldn't offset the accelerating input cost, but we didn't pass all of it overnight onto our dealer base and onto our customer base. So we did that purposely and strategically.
And that all three of those together and put a little pressure on margins, but it's temporary.
Craig as you know you've been following us for some time, we've been laser focused on margins and we and we still believe we have room do well, we do know we have room to grow.
To continue this advancement in this progress.
So this was just temporary Jim I don't know if you want to add anything to that yeah, Hi, Craig Jim <unk> here.
I'd just add if you if you look at Iot.
Two segments, you know lighting.
Sequentially the margin rate was down modestly less than a point quarter on quarter and that reflects all the actions taken to offset these higher input costs to the price increase and so forth.
You're always going to lag that slightly and so that less than a point degradation reflects that going.
Going forward, we're confident that we're going to be able to sustain our margin rates given no crazy.
Actions in input costs and then if you look at the.
Display solutions segment, where the decline sequentially was a little larger.
To Jim's point it was strictly a function of mix, there's three components to that that we look at internally to that segment and that is our petroleum segment. The margin was actually up sequentially a bit our grocery segment margin was actually up a bit and then of course our digital.
Menu board products digital signage and that was actually flat, but it was down in aggregate because the digital signage represented such a larger section a portion of the overall display solutions for the quarter because remember we've talked about that that's an integrator model, it's going to have a lower.
Than average gross margin rate, but lower asset utilization still at very very high Rona. So really the display solutions was strictly in summary, a function of mix.
Okay.
Thank you for that so another very important question.
Is supply chain.
Obviously unscathed by the challenges out there.
Others in the lighting and display markets are.
Not always so lucky right I think a number of companies have been impacted can you talk a little bit about what youre doing right. How you maybe pre positioned yourselves.
And whether or not you.
This similar execution of carryforward of over the next couple of quarters.
Yeah, well I appreciate the word unscathed.
It was that it was a it was a rough and tumble I mean, we were really duking it out and we continue to do it.
The thing that helped us the most on that was what we did two years back which was diversify our supply chain.
We really had you know.
We had a lot of concentration.
A lot of foreign concentration we brought a lot of our we tried to develop domestic supply chain partners under that built in the USA made in the USA.
So that was number one we did diversify so were not concentrated strictly on the far east we do have some.
South American supply partners and others.
If you'll notice our inventory, we did build a little inventory and we've been doing that over the last three quarters, maybe four at this point.
But we knew that we did that purposely to help.
Create some safety margin if you will in the gaps.
And potentially incoming input supplies and we have struggled with some of that probably most acute was graphics with some of our like many people. Some of the chip solutions, we have where we have everything ready to go minus literally one chip.
And the.
Fit to that though was.
We have a number of customers that we're very committed to a certain product design and we've advanced the design and some of our solutions.
Basically in house here, we call it system on a chip, which was integrate some of the display driver solutions into our menu board and we had some customers that were had mixed feelings about it are they werent sure. If they wanted to make that jump because they had uniformity and consistency in some of their current.
Solution, but I will tell you that the timing couldn't have worked out better I mean, I would certainly trade the system on a chip for no pandemic, but.
Because of some of the pressure on the on the chip supply we were able to give a different.
Essentially a different chip, but a different design.
Offering to these customers and it's really advanced us in that so we feel pretty positive about that too.
We're not.
To supply chain disruption.
I think that our team has done a very good job of the buy ahead I think they've got very aggressive plans and they've been working at going forward and I think any disruption if we experienced anything will be minimal at least for.
For the time being and we continue to work to stay ahead of that income.
Greg I'll, just add we started with the premise.
We were not going to extend customer lead times. So we're starting with that premise and what do we have to do in order to maintain those and that led to the series of activities increasing inventories.
And other metal and other elements to combat that and they've been proven to be successful, thus far and we're committed to maintaining customer lead time, we're not 100% but.
Just in case any customers or listen they wanted to call them.
I realize we're not 100%, but I do think that we're beating much of the market.
Great. That's really good to hear congratulations on this really strong execution, we look forward to continued progress.
Thank you Craig I appreciate it.
Thank you. Our next question is coming from Amit Dayal of H C. Wainwright. Please go ahead.
Thank you and good morning, everyone.
Most of my questions have been addressed.
In terms of the products you are now planning to work on you know what kind of new products should we sort of expect from you in a post GSA environment.
Well I think that first of all GSI has a pretty robust.
Product development pipeline they have a good engineering team they have some thoughts.
Probably one of the most interesting ones and I think one of the.
One of the ones that would be.
Is being very well received and we will continue to be well received as the use of alternative refrigerants.
Sure.
Mentally friendly.
The whole refrigerant thing if you go back to R 22, and free on and the advancements we've made since that time, you know looking at ozone depletion and things like that.
That whole industry is not exclusive to GSI has really been disciplined about looking for other solutions in refrigerant. So from a design standpoint, strictly engineering and product standpoint.
They have.
Good pipeline.
As far as us combining as far as us combining what we want where we can get some.
Joint development and things like that.
Obviously, we make lighting and graphics.
Big piece of their solutions to ASI solutions are based around the look and feel of their product.
We believe that from a graphics standpoint, and these are graphics, I don't mean posters and things like that I mean, the wood faced elements.
Metal.
Industrial looks.
<unk> highly engineered highly customized products, we think that we already believe that the graphics group can help them quite a bit in terms of what they can offer to their customer base.
Obviously, theres a lighting aspect.
Interior lighting to help feature of the display the foods and the products and the cases in a better way and then outside of engineering the commercial opportunities that we have.
Thats something that is part of our original investment thesis, we look at how we share a similar customer base, where there is overlap and where there is extension and how we can bring each other into different markets and that will take some time, that's not going to happen overnight.
Could take a better part of a year plus maybe two years.
To really realize the momentum in that.
But we've already started that process of identifying those opportunities and we're very excited about it.
Thank you for that and then you mentioned backlog has been growing nicely from a percentage perspective with snowflake absolute numbers could you share like what kind of improvements you're seeing on the backlog side.
I'm going to let Jim <unk> comment on that but before he does I'm going to say that.
You know I mean in general and I don't know if you actually as I'm, saying I don't know if Jim will have anything to add to it in general our backlog coming into the beginning of 2022 was strong.
I can't say that backlog in itself has made any significant changes, but I will say that quote rate has gone up significantly.
And some of that is because customers are saying our agents and customers are staying current on any inflationary pricing in the materials.
But the other half of it even if we subtract that theres just a lot more.
Project interest and I don't know if it's because there were projects that were put on delay or put on hold in the past or because people are digging in and they're looking at the infrastructure side and new projects that may be partially funded by the current administration and infrastructure projects and things like that but.
Our quote activity has been very high Jim I don't know if you want to add anything in terms of backlog.
One comment I will make is we monitor our our book to Bill ratio very closely and you know throughout the fourth quarter. Every month, we had a positive book to Bill book to Bill ratio over one and that's continuing as we saw through through July so given that.
That also then contributes to increasing our backlogs our backlog is as we exited Q4 and actually as we exited July has increased both sequentially as well as to prior year.
Understood.
That's all I have guys I appreciate it.
I appreciate that and thank you for the questions and thank you for their participation.
Yeah.
Thank you at this time I would like to turn the floor back over to Mr. Clark for closing comments.
Well this is Jim and I would just say again. Thank you for taking the time. Thank you for the questions and the comments.
Where we're not unlike any other business, we have employees and people that work here that are navigating the current challenges that we have environmentally.
I think that we've we've seen the energy and the capability of the team and I'm very proud of the folks that have been here and found ways to help us navigate through supply chain challenges and through labor challenges and found ways to operate safely in the environment that we're in.
I would say that.
<unk> ratio is very important to our employees our customers and our investors.
Think that we've been able to maintain a high say do ratio and we will continue to focus on that moving forward.
Our number one kind of focus as we want to stay committed to the things. We say, we're going to we're going to do so that we do maintain that high say do ratio with that said, it's an environment. That's in constant change. We've got good people to help us adjust to that and we look forward to the normalization of the environment.
The continued growth of LSI for for everybody, that's part of LSI, whether you're a customer employee or a supplier and I just wanted to say.
Thank you and thank you for the time on the call today.
Ladies and gentlemen, thank you for your participation and interest in LSI industries.
I'll go for webcast or disconnect your phone lines at this time and have a wonderful day.
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