Q2 2023 LSI Industries Inc Earnings Call
[music].
Greetings and welcome to the LSI industries fiscal second quarter 2023 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.
Once you 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 <unk> Chief Finance Officer. Thank you Jim 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 second 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 second 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 second 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 LSI, President and Chief Executive Officer, Jim Clark.
Thank you Jim and good morning, all thank you for joining us on today's call.
As you've likely seen from our press release, we had another strong quarter in our Q2 fiscal 'twenty three and.
In fact, this is our seventh consecutive quarter of double digit organic growth.
It's quite an accomplishment given the ongoing headwinds through the general economy ongoing supply chain challenges and disruptions in the construction market.
My hats off to the entire team at all or Si along with our agents and partners.
Sales for the quarter were up more than 16% year over year net income up over 107%.
We had strong free cash flow performance and I'm happy to say, our net debt sits around 60 million, which is a one three times net leverage ratio.
We're in a good spot going into the second half of the year and Jim <unk> will provide a deeper dive of the financials in a few minutes.
Our strategy around vertical markets continues to pay dividends and is reflected in our growth.
Oh no market is recession proof, we do believe that a good swath of our various vertical markets has provided us with some hedge against the current headwinds and have proven to be recession resistant creating growth opportunities. It outpaced the performance of the general economy.
Our refueling market continues to perform well.
Although recovery in Mexico continues to lag our expectations, we have developed opportunities in other locations that are offsetting are delayed projects in Mexico.
In the second quarter, we substantially completed approximately 200 site rebranding project in Puerto Rico for a major oil retailer.
This represents our first major product chipped in Puerto Rico, and demonstrates the strength of our systems and processes.
Which allowed us to substantially complete this major project in a new market without a blip.
We will continue to look for those types of opportunities and expand accordingly.
As many of you have seen we issued a press release a few weeks back regarding a solar installation, we completed for an oil retailer in Austin, Texas mid year last year.
A few months of the system running and operating we were able to provide some interesting numbers in regards to energy savings and the payback period related to the initial investment.
We see the canopy at most petroleum retail locations is an untapped opportunity and this project is a good example of how we can turn this unused space into a real profit center for both us and our customers.
Let alone the environmental impact of the clean energy production.
I want to caution everyone that this is simply a first step but it does go a long way into underlining the opportunities and possibilities of expanding products and services, we can offer and our various vertical markets.
Our grocery store vertical continues to deliver above expectations.
In this last quarter, we were awarded another major project by one of the nation's largest retail grocery store chains to provide approximately 12 to 1500 units a refrigerated and non refrigerated display solutions.
Which we will substantially complete and deliver by the end of this fiscal year.
We continue to provide various print and lighting solutions to a wide group of our grocery customers and.
And we're experimenting with some other goods and services, we can offer to this market.
I hope to have some interesting news to share with you regarding these efforts next quarter.
Our automotive market continues to show a number of growing opportunities and engagement of our team in a number of new projects.
This week, our automotive sales team will be attending the National Association of automotive dealers Natter trade show and continuing to advance our position in this market.
Despite several external factors affecting new and used car sales. This market continues to show good solid activity.
Lastly, our sports CT market has been moving along nicely with a number of larger wins recently.
As we've spoken before our company does have some seasonality built into our normal sales cycle with our focus on outdoor lighting solutions. It means that a good section of our sales are exposed to the realities of winter cold weather and construction activities at slow during winter months Q.
Q2, and Q3 normally represent are slower months and although I do not expect us to outsmart winter, we have been very fortunate with our record setting third quarter last year and a very robust Q2 this year.
You can be assured we'll be looking for every opportunity to keep that momentum going.
Next week, we will be hosting our annual national sales meeting in Cincinnati.
At these meetings, we bring all our sales marketing and <unk>.
Development and engineering resources together for a very full agenda.
As we've done in the past, we will have a combination of workshops sales training product training for our sales and marketing folks.
This is a big investment historically paid big dividends and we're excited to make this investment and move forward with this meeting.
Immediately following our national sales meeting, we will be hosting our third annual partner and agent virtual sales and tech meeting.
Sharon lessons learned from our national sales meeting along with new product introductions and best practices learned over the last year.
Going into our Q3, our quote activity across all sectors remained strong.
We are still facing some significant headwinds, but we leave we believe many more opportunities ahead of us and we're working to improve both our topline and our bottom line.
With that I'll turn the call over to Jim <unk> for a deeper look at our financials.
Thank you Jim.
Positive momentum in our business continued throughout Q2 generating double digit sales growth expansion in our gross and operating margins significantly improved earnings and earnings per share and strong cash flow.
The period saw continued healthy demand levels across across both reportable segments and operational execution continued at a high level.
Sales increased 16% year over year for the quarter with both reportable segments attaining double digit growth.
Lighting, increasing 17% and display solutions, 15%.
We continue to leverage our position and market verticals, where we have a strong position and advance our position in verticals identified with profitable growth potential.
Reported operating and net income were double the prior year quarter with reported diluted earnings per share of 22 cents and adjusted earnings per share of 26.
This compares to 11 cents and.
<unk> 15 cents, respectively last year.
Adjusted EBITDA increased to 13 million, 54% above prior year and our adjusted EBITDA margin rate was 10, 1% our second consecutive quarter of margin exceeding 10%.
The business continued to generate solid free cash flow.
Second quarter cash flow of approximately $9 million increased cash flow for the first half of the fiscal year to $19 million.
Our strong cash generation reduce net debt $17 million in the first half of the fiscal year and over $25 million from the prior year period.
This served to reduce the ratio of net debt to trailing 12 months adjusted EBITDA to one three times.
Debt reduction remains a capital allocation priority and provide some flexibility to pursue investments in both organic and inorganic growth initiatives.
Now a few comments on segment performance.
Momentum continued in the lighting segment.
Sales increased 17% and adjusted operating income improved 45%.
Demand remains broad based.
Our independent sales network provided significant year over year growth in our direct national account sales continued to expand with orders received from several new customers in the quarter.
We noted in the press release, the substantial growth in sales for indoor application.
Selecting the progress in providing a specific complete solution set for key vertical markets serving to increase our average order size.
Selling prices remained stable in the quarter and commodity costs continued to moderate.
This combined with volume growth was responsible for the improved earnings and margin expansion for the quarter.
We reduced lighting inventory, 7% sequentially in the second quarter, reflecting ongoing supply chain stabilization.
Lighting <unk> remained somewhat above historical levels.
Opportunities have been.
Been identified to further reduce inventory moving forward, while ensuring product availability to meet projected customer demand.
Project quotation levels in Q2 remained steady at a high level and we exited the quarter with a backlog of mid single digits above last year.
Moving to display solutions sales increased 15% and adjusted operating income approximately doubled to $8 million.
The gross margin rate increased 620 basis points, driven by volume leverage improved program pricing and favorable program mix.
Jim mentioned, the Puerto Rico branding program for a large oil company I want to point out our high level of fulfillment and service performance on this and other large highly customized display projects across the refueling C store, <unk> and grocery verticals as permitting issues and customer.
<unk> installation schedule changes continue.
Our teams pivot quickly collaborating with their customer to successfully meet the requested changes.
This capability continues to be a differentiator for LSI in the market.
Concept design and pilot work for prospective new programs remains very active in the display segment with over 20 proposals for new and existing customers and progress.
To summarize it was a solid quarter for the business highlighted by strong financial and operational performance.
We continue to effectively manage expenses, while investing in programs to identify and support both short and long term profitable sales growth.
Looking forward well order activity is expected to remain healthy in Q3 with sales reflecting normal seasonality.
I will now return the call back to the moderator for the question and answer session.
Yeah.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is another question you May press star two if you'd like to remove your question from Makena for participants using speaker equipment and may be necessary to pick up your handset before pressing this market one moment. Please while we poll for questions.
Thank you. Our first question is from George Tier rig tests with Canaccord Genuity. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my questions.
Gratulation John continued excellent execution.
So.
Maybe if I can start off with the question about.
Just strategy.
<unk>.
Now brought down your debt to what seems like a reasonable levels.
Generating cash the business is going well.
So can you just kind of think about the next 12 24 36 months you know how do you think about the positioning of the company.
And how you plan to use your balance sheet is to potentially repositioning and accelerate growth. Thank you.
Hey, George Good morning, and thanks for joining and thanks for the question and the complement relative to the performance over the last quarter.
You know our strategy has not fundamentally changed we are very committed to our vertical market strategy across the organization.
We're looking for businesses that we think or.
No such thing as recession proof, but recession resistant.
<unk> growth opportunity and have long legs, meaning.
Three 510 years out that we believe there is something.
Structural to those businesses that will continue to create growth opportunities for us. So we remain very committed to that in terms of paying down the debt.
In strengthening our balance sheet and repositioning ourselves there is two ways, we're going to grow right. The last seven quarters, we've grown through organic growth.
But we've always said that acquisitions and being able to add.
Add to our portfolio of solutions to our customers, particularly aligned with the verticals that we're in is going to be important for our kind of out of market.
Above market growth, so we're going to keep continuing to execute against that I think as we pay down debt. It just continues to open up the opportunities for us to look to add something else to the portfolio.
We try to keep a very active pipeline and then it's just a matter of.
The opportunity coinciding with us being in the right position in the markets aligning relative to a growth opportunity and it will be ready to execute.
Yes.
Thanks.
I wasn't necessarily the best student when it came to matrix algebra and advanced.
Mathematics, but it doesn't take a.
A rocket science.
Okay.
Well above what you've outlined for 2025 guidance in terms of the $500 million.
In revenue and $50 million in EBITDA. So I'm curious if you can kind of help us understand what your business is capable of like when you look out a few years, what sort of margin structure, what sort of revenue structure and should we look to to understand the company.
Well I think there is.
Well, let me start with this first of all we are looking to revisit that in this quarter and kind of update.
What our goals are and what our targets are and we hope to share that wildly by the end of the year.
Not sooner by the end of the fiscal year, if not sooner.
We definitely see growth opportunity, both topline and bottomline.
We do see what we believe is still a lot of runway left for us.
This concentration on the vertical markets just allows us to get.
Get a greater share of wallet and we've always talked about that at the cost of sales and the cost of confidence in the customer are very high prices, we pay any company pays to get in and create a relationship with a customer.
We need to make sure we're executing on the basic commitments, we make to the customers, which we do do very well our say do ratio still remains very high and our ability to deliver our products and then the services that go along with them, we've been executing and firing on all cylinders on that for quite some time and we are.
I remain committed to making sure. We can continue to do that but if we look at what the cost is relative to to interfacing and dealing with the customer. It is that initial order the ongoing orders the confidence that customer has and we believe we're in an environment, where if we can continue to execute like that maintain the confidence and trust of our customers.
We can add additional <unk>.
<unk> offerings, whether their products or services or a combination of bolt into that so when we look at what our growth opportunities I know a few years back we caught a few people off guard with going into refrigeration with the ESI acquisition.
But you can see how well that paired up we do have synergies, we don't expand on them too.
Great length, but we're both in their GSI LSI were in there as one team as one company and we benefit from selling across the product across our product and solution lines to those customers.
As we look forward, we wanted to make sure we leverage on that some more bolt in the growth we look at it as a three legged stool.
Both in our commercial market by picking the right verticals to be in.
Growth through our organic activities, meaning we become that much better at managing margin and managing profitability and we think we have a long runway to go with that we're not out of ideas, we're not out of opportunities and thats in that regard.
And then lastly, what can we add from.
And inorganic or acquisition, it's those three kind of things that we're focused on and we plan to like I said re vamp our targets.
You know I also say that.
There were some pretty lofty goals, when we sat down and we turn them out we actually sat down in December of 2018, we brought it.
To the market.
Q3 of 2019, and there was a lot of skepticism. So we need to make sure that we're pushing ourselves in a healthy way.
But they were also able to deliver so those are the things. We're working on now and we think we have a lot of runway past, the 500 and double digit EBITDA.
Greg. So you are still a growth company is the message and we will hear more about that plan.
Yes, we're still a growth company and we don't see that extinguishing any you know we've got runway.
Got it and maybe just lastly, there was there's been some M&A in the supermarket channel also proposed M&A I should say.
And.
That was the potential for disruption, but it sounds like it's turned into something that's the opposite is that an accurate characterization of the activity youre seeing in the marketplace in that particular channel.
But we don't have a crystal ball, but I agree with what.
What you were saying is we've always looked at it as an opportunity we.
We certainly had our planning sessions and we looked at it if it didn't turn the way that we.
Anticipated attorney, but we've always seen it as an opportunity and underlines what we've talked about for some time, which is this this space is going to continue to get competitive.
Little things Youre going to matter and that's what we're very good at delivering.
And we're good at delivering that differentiation, we're good at helping promote the brand of our customers in helping promote the differentiation of our customers and we think theres a lot of runway left.
Pacific to grocery.
Right, Thanks, guys I'll get back in queue.
Alright, thank you.
Thank you. Our next question is from Aaron <unk> with Craig Hallum. Please proceed with your question.
Yeah, Good morning, Jim and Jim It's Aaron's mahalo, thanks for taking the questions.
First for me you know good to see your commentary on the second half outlook can you just talk a little bit more maybe about the increased visibility you're getting you know in the past you've talked about some of the multi site projects in refresh cycles kind of compressing just trying to balance that outlook with you know some of the puts and takes with with seasonality as we kind of look to.
<unk>.
Yeah well.
Seasonality is always something that.
We've talked about quite a bit we have.
Our focus in a lot of our products as our door and they are affected in ways that we just don't we cant forecast or C. So anytime we get into Q2 and Q3, we anticipate expect some seasonality.
Obviously, we bucked that trend last year with a very very strong Q3, and we're backing it a bit this year with a very strong Q2.
The <unk>.
Unforeseeable events that happened in the Q I don't think that they structurally effect.
Our momentum of our growth, but if you have a large snowstorm that effects.
Construction activity for a week or two sometimes as they remove snow and things like that it slows down project and it slows down some of the timing so.
Q2, and Q3 have always been a little bit of.
We've had a little bit more.
Variability to them. If you will and then like I said, you just kind of underlying in general the fact that a big part of our business is outdoor we do do a very robust indoor obviously, but.
Outdoor weather is affected in that type of thing we can anticipate some slowing but again like I said last year was an exceptional Q3 and Q2. This year has been it was obviously very strong as you guys have written on the large project activity.
These kinds of things.
Our large projects tend to work.
Over many months period, sometimes years, and so the up or down that occurs within any given month of February or March or <unk>.
August or September we don't really see that much they're kind of live events. If you will but they don't really affect the length or commitment of the projects in many of the projects. We've been engaged in are these larger projects and specifically to one of the comments you made.
What we see is if we went back 10 years ago, we saw a refresh cycle that was much closer to we will see an average of seven years.
If we go back five years ago, we saw refresh cycle that was starting to come under seven years and bouncing between five to seven years and now as we look at things today, we're seeing a refresh cycle that solidly in the five and in fact trending lower all the way down to three years and I think it speaks a lot.
<unk> two.
The fast pace of.
We always say that tick tock generation, which is to just keep the image looking fresh and new.
And attracting customers.
Creating an environment where the.
Customers were dealing with are showing to their customers that they are keeping pace, they're continuing to invest in their properties and their offerings and it's just to kind of capture that attention of the consumer which is just those emotions in the buying habits in those type of things are just moving a lot faster. So we obviously see it as a.
A very positive trend for our business.
Great great. Thanks, Thanks for the color there and then you.
Maybe just can you talk about some of the new products that you've launched over the last couple of years, you know I know you've refreshed completely some some verticals and you kind of called out indoor this quarter can you just kind of talk about how that has helped and maybe some of the areas that youre kind of focused on going forward.
Well if I go back four years ago, I remember getting on our call in saying we were going to have.
Almost 20, new products launched in the year.
And since that time, we've kept that pace plus.
And those products are not necessarily.
Game changing technology products.
As much as they are.
Tweaking existing product lines don't get me wrong, we do have the game changers by the way, but the core of it is taking our core products and just incrementally making them better to serve our customers better, particularly as we continue to orient ourselves around vertical markets.
We have a lot.
Serve.
A variety of markets and that will never go away that.
These products can be applied to a number of markets, but the learnings we walk away from in our vertical markets. We tried to incorporate into our products, whether it's easier to install or more controls aspects or variations in lighting forward throw things like that.
We continue to at least introduce a minimum of 20, new products each year and we're on pace to exceed that this year.
And in terms of game Changers, I will talk about one.
Because it is normally balanced.
We introduced already Mount and I think we talked about it last quarter.
But it's already Mt is really geared towards.
Being very easy for the installer to install which makes it you know we're an installer might have a two hour install per fixture they already amount cuts that that install time down significantly and that makes it easier for the installed installation teams and installers to use our products it lowers the cost to our customers by reducing.
The install time and it has some embedded opportunities in our longer term quicker refresh cycle.
The ability to maintain and service these products through a simple turn and click if you haven't looked at the ready Mount I'd encourage you to go up to our website and just look at it. It's another way that we're kind of innovating in that innovation isn't just in the technical aspects of our products, but in how people use them and how they install them and that type of thing.
Right right. That's good color. Thank you and then maybe if I could just sneak one more in you know saw the grocery award and continue to expand our wallet share. There can you just kind of elaborate a little more on some of the cross selling opportunities that we've been looking at from from GSI.
An update on where those stand and anything else on timeline or kind of contribution potentially.
Yeah, absolutely and before I hit on that let me add one other thing that we're just talking about new products. I also wanted to add because they tend to talk about the lighting aspect of it quite a bit but you know in the print materials and in our.
Our canopy canopy.
Canopy designs and things like that we use a variety of different ink and printing materials. Some of them may metallic some of them different composite materials things like that and that's an ongoing partnership with our suppliers.
It's our understanding of those materials that help us articulate to our customers. What are you looking for are you. In a you know are you anticipating that you're going to update this in three to five years, because this ink and this combination will give you a good color.
Capture and we'll hold that color and everything for.
Three to five years, but we wouldn't want to push it past six so those discussions go on all the time and.
And they affect the decisions that customers make both short term and long term because if we're putting in something that we know has a kind of a useful life of six years, then that that decision has to be made with the understanding that they intend to updated in less than six years, if they say hey, listen we may want to stay with this image. This look.
For a longer period of time, then it changes the selection we make on the materials and the conversations we have with our customers and how we apply them. So those also are in that new product and the last thing I'll say is specifically the GSI.
We're in the refrigerated space, we are constantly looking at the refrigerants, we use and the impact they have both the operating impact and cost as.
As well as environmental impact and ozone depleting refrigerants versus natural refrigerants and things like that so those are all things that are going on simultaneously.
Now to flip tier.
Your question about how we look at what we call. It boundary was selling in here, which is is that anytime one of our sales focus in talking to a customer that we're making sure that regardless of what the entry point is once we are in an established with that customer that we're talking about the full product portfolio.
Whether youre at GSI, or LSI or lighting or graphics or whether you are with our services group that conversation happens all the time, it's hard to articulate.
<unk>.
So and so brought us into this opportunity or lighting brought us into that but I'll just underline that its constantly it's a constant occurrence and it's a discipline and a process that we're underlining with our folks all the time you can be assured it will be one of the things we're covering at our upcoming sales meeting next month and.
I don't have any specific numbers to quote, but I'll just say that.
They continue to be promising.
These projects tend to take some time to mature because youre talking about maybe taking an incumbent sometimes in making a change so.
There is often times where were given a small pilot program a small test program.
And we're also introducing kind of newer technology, if you will the whole idea of.
Having this continuity in terms of the way we look at graphics in the materials, we're using and everything we have new buyers come in to the situation and we need to earn that trust and so I'm not unhappy with the pace that we've been moving.
And I think Youll continue to see wins out of that as we move forward.
Good good I appreciate all the color.
Thanks, I will hop back into queue can turn it over.
Thank you Erin.
Thank you. Our next question is from Amit Dayal with H C. Wainwright. Please proceed with your question.
Thank you good morning, guys solid quarter congratulations.
Just to begin with Jim maybe if you could provide some granularity on.
Where the operating leverage improvements are coming from is it just better pricing or larger.
Maybe some efforts on the cost side.
That would be helpful. Thank you.
Yeah, Amit thanks for joining thanks for the comments.
It's all of those things and I know it always.
Everybody always wants to kind of identify one that were over leveraging or that we're really taking advantage of but it's really execution against all of those things.
I call. It the paper clip effect, which is just small incremental changes across the whole our whole.
Scope is the things that contribute to these improvements and I underlying off in that I think that we have a lot of runway left.
I do think that we have a lot of continuous improvement that we can offer.
We are by no means operating at a 100% efficiency and so every time I look at that as a tier individually and as a team we recognize that those opportunities still kind of.
Are in front of us so price is an important element, it's something that we've been very disciplined about and.
Along with that price.
Comes reliability to our customers on time delivery and that type of thing and when we have on time delivery that means that we need to be operating efficiently and we have.
Less margin for error in and waste and so we work on those things, which are which creates opportunity and so it's really kind of an aggregated look at the business and it is us executing against all of the elements you just talked about.
To gain that.
I can't underlying enough and I think we've been demonstrating it is that we still think we have quite a ways to go. So those opportunities are still in front of us.
Understood. Thank you Jim and then you know from a revenue growth perspective are you taking market share in both the lighting and display segments from other players or maybe in other words.
Is this the Sam expansion story that LSI is benefiting from you.
Winning more market share given how you have executed over the last two years.
I think it's definitely a market share right. If you think we've had above market growth now for seven consecutive quarters, there arent too many companies, particularly with the broad based type of solutions, we have that are experiencing double digit quarterly growth.
So and we know that the market is not growing at that rate. Although we anticipate that there are opportunities for the market to grow at that rate, particularly when you look at our the verticals were in so we think it's the alignment with the right verticals. It like I said, they may not all be growing at double digit.
Double digit rates, but they are healthy and they are more resistant to the general pressures. These general economic pressures number two is it.
We're sitting there, we're providing and filling orders and were.
I talk about an opt in or say do ratio that we have a high say do ratio right. We sit in front of our customers make a commitment and then work exceedingly hard to make sure we deliver to that commitment and that's garnering us a lot of favor, which is which is turning out to be us taking market share from our competitors so that.
That's what I think is happening.
We're taking market share and that's accounting for a lot of our our above market growth, but it's also underpinned by the fact that we're just in generally healthy markets for the most part.
Thank you Jim that's all items.
Thank you.
Further questions at this time I'd like to turn the floor back over to management for any closing comments.
I just wanted to say thank you again for everybody.
<unk> called in and follows us and listens.
We have a great story in front of us here.
As we underlined here through the Q&A today, we believe we still have.
A lot of opportunity in front of us.
And we believe we can continue to grow like this it is a extraordinary effort by a team of folks here. So I just want to underline and say, thank you to the whole team and to our partners agents and customers we.
We will continue to deliver we will continue to look for those growth opportunities and I look forward to our next call take.
Take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.