Q1 2023 LSI Industries Inc Earnings Call

Ladies and gentlemen, greetings and welcome to the L. S site industries fiscal first quarter 'twenty 'twenty results 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 to introduce your host Jim got leased CFO .

Please go ahead.

Good morning, everyone and thank you for joining.

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 LSI Corp dotcom.

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 first quarter GAAP and non-GAAP results is contained in our press release and 10-Q.

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 first quarter results.

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.

Thank you Jim Good morning, all thank you for joining us today.

As you've likely seen from our press release, we had a strong first quarter and I'm very pleased with the efforts and the results of the company and our entire team.

Sales were up almost 20% at $127 million compared to the same quarter last year.

Net income doubled and adjusted EBITDA top 10 by two 5%.

On top of more than $10 million in free cash flow.

Again, just a solid performance in a challenging market by a great team of folks across the company.

Our display solutions segment sales were strong.

But they were a bit constrained this quarter as we were impacted by both a supply chain issue, specifically, one supplier who provides a graphics component and ongoing permitting issues that continue to occur across the country.

Despite those challenges orders for the first quarter were up 12% on the prior year.

Our gross margin rate increased 450 basis points and operating income improved more than 70% as opposed to the same period a year ago.

We're engaged in a number of test projects and we feel good about the opportunities in front of us.

Our deployment installations, continuing to move forward with the mix of new customers and ongoing projects continue to line up very well with our vertical market focus and our current product offerings.

Moving onto our lighting segment, we had an outstanding quarter with strong sales growth and margin improvement.

Both of our project business and stock and flow business enjoyed a strong order rate and orders increased by double digits compared to a year ago.

Although we have a strong focus on outdoor lighting, we do and always have had a very robust indoor product line.

The indoor line enjoyed a particularly strong quarter and gained some significant traction strengthened by a number of new product introductions.

And our continued effort of introducing our solutions to new and existing customers.

These results are a great reflection of our vertical market strategy, whereas we provide an ever increasing basket of products and services to our customers.

Earlier this month, both L. S. I N J S. I jointly attended the National Association of convenience store Conference next in Las Vegas.

The show was extremely well attended rebounding from Covid.

LSI was a true star at the show with the introduction of a number of new products, including one called they're ready Mt.

They're ready Mt is a mounting adapter, which significantly cuts the installation time of under canopy lighting well. It also provides a quick service maintenance and upgrade path in the future.

It was extremely strong demand for a solution like this and we didn't see any competitive products in the market filling this gap.

It was a great feeling when you see folks lined up three and four deep outside your conference show Booth, just to see just to take a look and see it as a product.

We believe that there are many more opportunities to continue to differentiate ourselves in the lighting category.

We continue to find ways to innovate and bring new features and functionality to all our solutions.

We're laser focused on finding ways to serve the markets. We currently serve as well as exploring lateral expansion into other vertical markets that fit with our overall strategy.

As we put the first quarter of the fiscal year behind us and look forward to 2020 three we see many opportunities developing despite the uncertainty in the general economy.

Although supply chain issues and ongoing permitting issues remain some of our biggest challenges.

In most cases, we found a way to work within the constraints and challenges. These.

These issues create this quarter's revenue numbers speak to that ability.

We're well positioned for a strong second quarter, our customer and agent relationships have never been stronger.

And we look forward to continued improvement.

With that I'll turn the call back over to Jim <unk> for a deeper look at our financials.

Thank you Jim.

S. I delivered a strong first quarter with all key metrics generating substantially improved performance.

Sales growth of 19% represents our sixth consecutive quarter of double digit growth.

Growth was realized across multiple verticals as well as both our lighting and display solutions product segments.

Margin expansion continued in fiscal Q1 with gross margin improving 430 basis points versus Q1 last year and strong increases in adjusted operating income net income and EBITDA margins as well.

Adjusted EBITDA margin improved to 10, 5% in Q1 with both segments realizing significant year over year improvement.

We're encouraged that multiple factors are contributing to our continued margin improvement.

Led by increased volume leverage successfully aligning selling prices to ongoing inflation.

Service execution meeting demanding customer requirements project mix and solid cost management.

Improved income performance produced earnings per share of 25 cents in the quarter approximately double the 13 cents in the prior year quarter.

Free cash flow generation increased substantially in the quarter.

$10 1 million versus cash usage of $8 2 million fiscal Q1 last year.

Working capital stabilization has enabled a higher conversion of earnings to free cash flow.

Q1 represents the third consecutive quarter of positive free cash flow following several quarters of investing in additional inventory to mitigate supply chain challenges and support sales growth.

We expect positive cash flow to continue moving forward.

Improved cash flow reduced the ratio of net debt to trailing 12 month EBITDA to one seven times.

Shifting to segment performance.

<unk> delivered an excellent quarter.

Compared to last year sales increased 32% gross margin of 33% increased 290 basis points and operating income more than doubled.

Strong sales growth was led by high levels of activity in multiple vertical markets, where our sales and marketing efforts continue to strengthen our position.

These include refueling C store parking automotive and warehousing.

We're also making good progress in other attractive markets, including applications for the institutional and sport's lighting markets.

Following multiple price increases in fiscal 'twenty, two selling price realization is enabling us to offset the impact of inflation and leverage the favorable impact of improved volume and service capabilities.

Overall, we expect pricing to remain stable at current levels for the short term.

Order activity for lighting in Q1 remained at a high level with.

With the orders, 11% above the prior year quarter.

We enter fiscal Q2 with a continued healthy backlog.

17% above the same period last year.

Performance for the display solutions segment was also favorable sale.

Sales increased 8% gross margin improved 450 basis points and operating income increased 72%.

The sales increase was led by continued strong demand in the grocery vertical.

And year over year growth and are fueling C store.

Growth in these verticals was driven by increases in both refrigerated and non refrigerated food display cases and print graphics solutions.

In Q1, we completed initial installations for a global oil company branding change in Puerto Rico.

And site install activity will continue throughout Q2.

In addition, we have started digital menu board install activity for a <unk> customer in Canada.

These combined with our ongoing programs in Mexico reflect our continued regional expansion driven by our strong customer partnerships that we can cover.

The gross margin improvement for display solution was driven by improved pricing on all major programs and project mix you have but are just not good customer proposal activity across our display solutions vertical markets remains at a high level orders for the quarter were 12% above Q1 of last year and the backlog.

Entering Q2 is 15% above last year.

For LSI looking forward, we expect continued growth in fiscal Q2 compared to the prior year period and earnings and margin rates favorable to last year as well.

We continue to be diligent focusing on our target verticals managing cost and capital allocation priorities, which include debt reduction and investments in sales growth initiatives.

I'll now turn the call back to the moderator for the question and answer session.

Thank you.

Ladies and gentlemen at this time, we will be conducting a question and answer session.

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Ladies and gentlemen, we will wait for a moment, while the question queue S N France.

Our first question is from the line of Rick Fair on from a threat to capital partners. Please go ahead.

Hi, Good morning, Jim and Jim and congratulations on another.

Another truly outstanding quarter, and Jim in particular for making such significant progress towards.

Your stated goal of a couple of years ago that LSI would generate $500 million in revenue $50 million of EBITDA and.

Here, we are with a run rate of exactly that quarterly revenue of $127 million quarterly EBITDA over $13 million.

And now net debt standing at one seven times EBITDA and these are.

Just very impressive results.

And more more confirmation that you deliver what you say so.

Yeah, just I.

I know you're being very thoughtful about how L. S I chooses to grow both organically and via M&A.

Question is now that it's been about 18 months since the GSI acquisition in May of 'twenty one.

Are there lessons that this extremely successful business combination.

Uh Huh have taught us that can be applied to future acquisitions, and I guess as a corollary to that.

What types of businesses are situations would L. S I likely avoid in the future.

Well good morning, Rick Jim Clark here. Thank you for the comments and thank you for participating in today's call.

Yeah, I mean, GSI was a great fit for US as you know we stated a few years ago that we were going to be very vertically market oriented.

And we looked within those markets to either expand the depth of what we can offer those markets or do a lateral expansion. If you are a horizontal expansion of the vertical markets. We're in in this particular case, we saw grocery it had a number of reasons, we believe that a grocery would grow this goes all the way.

Back.

To early 2019 was mostly because of the disruption in the market, we saw with whole foods and fresh market kind of disrupting some of the traditional grocers and a real call our need for a number of the products and services we had.

Oh using that as you kind of a thesis we looked at companies that could help us in the depth of some of the verticals were in and J S. I was a natural fit.

Not only did we see something that had a lot of momentum behind it but we saw a cultural fit company.

With GSI and it is proving out.

Does it fit with the culture that our company had it didn't require a water restructuring in terms of you.

You know what it looked like two should have a good high say do ratio in those type of things, so GSI fit very well.

I think we will continue to look for businesses like that you know growth is very important to us we want to continue to grow.

We want to grow both organically and.

Through M&A.

But you know M&A, keeping that funnel filled and looking for companies that.

Fit our profile like J S. I did are going to be continually important to us in.

In terms of companies, we would likely avoid I mean I think that.

You know things could take us off of our mission.

Things that are you know are far left field from where we are.

Or don't have the potential for the growth or the investment in the in the segments. We're in those would be things that we would definitely stay away from.

Oh, Thanks, that's helpful and do you feel that.

You and the team have identified you know significant organic drivers within the business today or is.

Is it are you envisioning most of the future growth coming from M&A and I know that the synergies between L. S. I N J S. I've opened up the additional avenues are especially within grocery channels in C stores.

But are there other verticals that you.

Believe represent exciting opportunities at this point.

Yeah, I mean, a great question.

Sure and thanks for it you know I mean, we we talked about early on you know going back again, and just having a high say do ratio just saying, what we're gonna do and executing against it.

We talked a very candidly about the fact that we would have a portion that would be M&A and a portion that would be organic and you know about 18 months ago, we transacted on J S. I, which was obviously the M&A part, but over the last five quarters, we've had double digit organic growth and.

We show the balances there and we continue to kind of pursue keeping that in balance when you look at a company like J S. I you know we saw the opportunity to continue to serve some of the vertical markets. We're in but we also saw an opportunity to share some.

Some of the relationships the trust the prior years of service each of US had with the customer bases that we had so GSI in grocery in LSI in grocery both had a very good presence in there it just strengthens us that much more.

Convenient stores in market that we think we can bring J S. I do it in a big way.

And you know those type of programs take years to develop we talked about this.

Front, when we did the GSI acquisition, we have a number of tests.

Sites and test programs going on right now and we hope to convert those we have or we think we have a very compelling story behind it it fits in line with what a number of our C store customer to say what the future of service is going to look like in those environments in those stores and so we do have a good product line and bolt.

J S I N LSI to kind of serve those markets. So it's about balance and our goal is to continue to have that balance both through M&A.

And through organic growth, but growth in general is important to us we think scale matters.

In this business and we want to continue to make sure we stay relevant from that standpoint.

Sure and I'm I'm sure with you know Terry.

Terry's Terry you well, it's sort of thoughts side by side with yours, you guys have been able to approach new verticals that maybe he wasn't really focused on with J S. I.

That you know putting.

The two great minds together.

Come up with solutions for the C stores for example that.

Excite your customers.

Yeah.

You know I'll, just say you each of its Terry is certainly a very visible leader and J S. I, but his brother Mark is also highly involved and there's a whole team of folks there I mean, I could think of 10 right off the top of my mind and I could think of another 20 below that but it it goes to the underlying <unk>.

<unk> you know L. S is about is it's not one person it's a team of folks and I'm sure. If Terry was on this call he'd say the same thing. So we're you know we're very happy it's just strong leadership with a good team behind us.

Okay.

Both seem to be very similar leaders and finding that cultural fit as part of the magic I know and so I guess relating back to that inorganic growth.

That might require some additional capital investment can you can you share some thoughts about you know.

Equity issuances or utilizing stock versus currency for acquisitions.

Yeah, I mean, I think this comes to down to you know a sources and uses right.

You know what our options in terms of you know.

Forward opportunities and how can we invest in them and what do we have you know.

In our in our coffers, so to speak to execute against our go forward plans.

You know it becomes a big burden would.

With being a public company, obviously, we want to make sure we share serve our shareholders and the people that are confident and invest in us and at the same time, we wanted to make sure we're executing against growth that continues to retain those investors.

It keeps the story interesting so.

You know my personal.

Our preference is always around that.

I think we've talked about in other calls we certainly use that here with GSI and you see the cash.

Our free cash flow this quarter, and our ability to pay down debt and our leverage ratio being at 107 seven.

Below one eight right now.

We want to continue to move that stuff down and we do want to make sure that we are responsible with the way we do that it fits into our strategy.

<unk>.

You know in terms of making sure that we're ready to act with the opportunities in front of us and I think equity as a piece of that but you know it's.

It's not it's certainly not our first.

Go to <unk>, but it is something that's on the table for us to use.

That makes sense I mean, it's just it's another.

Arrow in the quiver, if you will when it's a fairly priced instrument that kind of gives you some optionality, which kind of gets to my last question, which I know you know, what's coming and I I've asked this on conference calls before but it really.

No I just I look at a stock price that we consider grossly undervalued with trailing 12 month revenue of $476 million.

EBITDA now on a run rate above 10% $41 million of trailing EBITDA.

Which had been growing quarter after quarter end and net debt now down to $69 million and declining.

It seems almost unfathomable that the enterprise value of this business is only around 300 million and about twice that so you know. This this is a story that you know the public market is still learning about I think in the Microcap space, It's incredibly inefficient Theres, just no research coverage and anyone who.

And small Microcap. These days are coming from the wealth management business is doing it through Etfs, which are blind to incredibly compelling stories like this.

And so you know I guess with the you know the recent board authorization of 50 million share buyback.

What are your current thoughts about activating attendee five dash one stock repurchase program or are you know or.

No.

I I know priority has been reducing debt.

Is there sort of an ordeal order of events still that you're you're looking at for that.

Well.

You know its always about total shareholder return right.

We wanted to make sure we do what's best for our shareholders.

And maintain that continuity of their relationship and be there for you would be making smart decisions. As an example, we remain completely committed to our dividend program. We it's part of our capital allocation model.

Spoken before that you know.

That is something that we're willing to use but we want to be very responsible with it and bring it down to a very manageable levels.

As you saw earlier this year earlier this calendar year, we did.

Authorized a program the board authorized a program to do a stock buyback.

Buyback and you know I I agree with you I think that.

Having the opportunity to invest in companies that can grow you have a big landscape out there and certainly when we look across that landscape, we look and say well what's L. S. I do and they're pretty impressive so would we put our money back and the.

The answer is yes.

It just.

I will just say this that it is constantly in our thoughts we review it quarterly.

We don't do things just for the effect. So you know the fact that we put that program in place certainly says that we're seriously considering it.

And as you know the best I can say at this point is we're aware of it and we're committed to doing what creates the best shareholder return and you know if that if that happens to be at you can be assured.

We will execute against it.

That's extremely helpful. Jim. Thank you and I know you know as you as you look at L. S side for example, as the opportunity among the landscape of opportunities you know here's Oh.

A business that trades at what many of US think is worth twice what it's trading at.

You know it's also another bite at the J S I, Apple which was fantastic.

Fantastic acquisition full price fair price, but are the synergies where we're.

Sort of a immeasurable and the opportunities it is creating a very exciting and then bringing on so you know the great cultural fit and the team that you you mentioned assembled over which ASI.

It has sort of off balance.

That sheet a value that is hard to quantify but it makes the future pretty exciting so.

Yeah, I like that way of thinking of you know are there opportunities within our own business to own more of it and.

Thank you again for encouraging your board to authorized the stock repurchase program.

Yeah. Thanks for the hard work this quarter and going forward.

Thanks, Rick.

Thank you.

Next question comes from the line of Amit Dayal from H C. Wainwright. Please go ahead.

Thank you good morning, guys.

Congrats on the quarter by the way I'm, just you know margin improvements Jim could you comment on weather.

These are here to stay you know any any commentary on stickiness of these improvements and how we should be thinking about you know I'm modeling for these going forward.

Yeah, I mean, I think you know our mission is to make them sticky we've done it in a in a very responsible way, we're creating the value for our customers that equate to the margins that we're producing right now theyre comfortable with the pricing. We look for you know there's two ways that we're looking to affect that.

One is productivity and our ability to kind of convert what comes in and in an efficient manner and we continue to make room, you know make forward progress on that and I think that we still have a lot of runway left relative to that.

The second is our you know the products, we're delivering and the partners that we are and I think that you know over the last couple of years, we've certainly been able to demonstrate again, it's it's a team of people, but we've certainly been able to demonstrate that value and so between the two of them I think that you know I do believe that we can.

Keep the margins, where they are and I do believe that we still have some runway ahead of us.

Okay. Thank you.

The fourth calendar quarter is maybe seasonal.

And given them some of you know the spirit in which.

He's the Guy who says that the grocery segment et cetera paid retail channels.

How should we think about the next quarter given the stronger than expected results for the fiscal first quarter.

Yeah. So you know.

Q1 was a strong quarter, we're very happy with it.

We're coming into Q2, as we said even on our last call. We don't have six months visibility or anything, but we do we do have 30, plus you know, sometimes 60 days of visibility and I would tell you you know we don't we don't anticipate any slowdown right now orders remained strong inquiries remained strong our quote activity.

<unk> remains strong and our backlog remains strong so.

You know frankly.

Permitting is is probably the most frustrating thing we're dealing with right now and I truly don't understand it I don't understand how permitting.

Permitting issues and those type of things continue to persist, but they do which causes a general slowdown in construction, which causes some of that lumpiness relative to our forward visibility.

We still balanced some supply chain issues.

You know I think that you noted in my comments.

Just a few minutes ago.

You know our digital program would have been even that much stronger and very happy with where it was but it would have been even that much stronger hadn't been for one singular component to it it's just.

Jammed up in the supply chain, but with all of those things into consideration. We do have some seasonality in our business you know cold winter a cold weather does kind of affect some of the outdoor activity holidays.

Starting with Thanksgiving through Christmas effects, some of our vertical markets those type of things.

With all of those things factored in now I still expect us to have a pretty fairly shrunk.

Q2.

Thank you.

No.

Rejections or the consensus estimates are calling for 4% to 5% annual growth, you're delivering 19, 20% year over year growth.

How should we think about you know the rest of the year given sort of the execution is coming in so strong.

Yeah, I mean, it's a you know it's a <unk>.

Great question I think as I was saying you know we've got you know I narrow it down to supply chain and permitting is as you know the top two but our list of we have 20 things that were dealing with still today that we didn't deal with you know four years ago.

So that our ability to continue to grow is something that's cheap.

Critically important to us.

But the comps are getting harder they get more difficult you know what I mean, we're talking about 100 $125 million quarters, where we had we were.

Historically, we had never broken 100 million dollar quarter ever.

So I feel confident about our ability to continue to grow.

Our internal goal is certainly double digit but you could.

We do have to factor in.

These quarter over quarters.

On a comparable basis, we're certainly keep raising the bar that's for sure and you know one thing on the permitting issues I know that some people don't always understand that so you just take a second dimension that you know on large commercial projects and things like that there's often electrical or building permits things like that.

They're usually hit it handled at the state and city level and in those folks.

Through either staffing or whatever it is are still working through a massive backlog.

It just.

It just causes some some consternation every once in a while and it just seems to be all across the country, but overall, our vertical markets that we're in remains strong and.

We remain optimistic about continuing the growth path we're on.

Thank you that's all I have for now I'll take my other questions offline I appreciate it.

Thank you for the questions and thank you for calling in.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the conference to Mr. Jim Clark, President and CEO for closing comments.

Yeah, I would just add I think we covered a lot of ground here today I would just say that on behalf of the team. We're very happy with the results of the first quarter. We remain very optimistic about the second quarter, we're very focused on growth.

Everybody in the company understands that it's unique opportunity right now we've got a lot of momentum behind the company and what we can do to continue to grow in.

<unk> achieved these results all under the guidance of you know, making sure. We're we're very good to our shareholders and create that return is as cheaply important to us so with that I just wanted to say thank you for calling in it's a little early but happy holidays to everyone online and we'll look forward to our next call take care.

Sure.

Thank you the conference off LSI Industries has now concluded. Thank you for your participation you may now disconnect your lines.

Okay.

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Yes.

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