Q4 2024 LSI Industries Inc Earnings Call

Speaker Change: Greetings and welcome to LSI Industries fiscal 2024 fourth quarter results conference call. At this time, all participants run a listen only mode. A question and answer session will follow the formal presentation.

Speaker Change: If anyone should require operator assistance during the conference, please press star on your telephone keypad.

Speaker Change: as a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jim Galeese, Chief Financial Officer of LSI. Thank you, you may begin.

Speaker Change: Welcome everyone and thank you for joining today's call. We issued a press release before the market opened this morning detailing our fiscal 24th quarter and four-year results.

Speaker Change: In addition to this release, we also posted a conference call presentation in the Investor Relations section of our corporate website.

Speaker Change: Information contained in this presentation will be referenced throughout today's conference call, included our certain non-gap measures for improved transparency of our operating

Speaker Change: A complete reconciliation of gap and non-gap results is contained in our press release in 10K.

Speaker Change: Please note that management's commentary and responses to questions on today's conference call may include forward-looking statements about our business outlook.

Speaker Change: Such statements involve risks and opportunities, and actual results could differ materially.

Speaker Change: I refer you to our Safe Harbor Statement, which appears in this morning's press release for more details.

Speaker Change: Today's call will begin with remarks summarizing our fiscal fourth quarter and full year results at the conclusion of these prepared remarks. We will open the line for questions.

Speaker Change: With that, I'll turn the call over to LSI President and Chief Executive Officer Jim Clark.

Jim Clark: Thank you, Jim, and good morning all. Thank you for joining us this morning and happy new year at LSI.

Speaker Change: as you know, our fiscal year runs from July 1 through June 30, so we are now into our new fiscal year 2025 at LSI and we'll be discussing our fourth quarter in full year 2024 results on today's call.

Speaker Change: I'm pleased with the results of Q4 and overall I'm pleased with the results of our full year 2024.

Speaker Change: We end the fourth quarter of 4% in sales compared to our prior year. We added a new business segment with the purchase of EMI industries in April and we continued to expand LSI's value to our customers by expanding our product and solutions offering in our core vertical markets.

Speaker Change: For the full year, 2024, we were continue to improve margins and our year-end just at EBITDA was up 11% up 60 basis points versus last year while free cash flow for the year exceeded $38 million.

Speaker Change: LSI's growth in most of our vertical markets continued outperform in 2024 while we did experience some steady market headwinds in our grocery store vertical throughout the year.

Speaker Change: Our execution as a company and as a management team remains high and I'm proud of the company's abilities to adapt to various market challenges and to keep and focus our responsibility to deliver results to both our customers and our shareholders.

Speaker Change: We often talk internally about our say-do ratio.

Speaker Change: It simply means we are doing what we say we are going to do. This commitment to be a high performance, say-do ratio extends to our customers, our shareholders, but it also extends to our co-workers, our suppliers, our agents, and so many others.

Speaker Change: This culture around a high safety ratio is cheaply responsible for our continued progress and it underscores our ability to adapt and to continue to seek out growth opportunities and execution excellence.

Speaker Change: In 2024, we accomplished a lot.

Speaker Change: We introduce the slew of new products in excess of 25. We open a new refrigeration manufacturing facility in Bangor, Maine, offering an entirely new type of refrigeration solution that uses environmentally-friendly refrigerants.

Speaker Change: R290 in actually occurring gas because there's no harmful effects to our environment.

Speaker Change: We expanded our capabilities in our electronics manufacturing segment and our capabilities in our on-site project management through our DAF services group

Speaker Change: We created a center of excellence around our print graphics business that will ensure our ability to provide robust print graphics solutions or at the same time being able to be more efficient and more profitable in this segment.

Speaker Change: Internally, we added to our management team, including additional focus on our operations and procurement functions while continuing to strengthen our sales, marketing, and engineering capabilities.

Speaker Change: We promoted from within and created opportunities for people to advance in positions of increasing responsibility while helping to expand the culture we have created at the company.

Speaker Change: We spent a lot of time this year with our customers and our partners.

Speaker Change: We hosted a record number of training sessions, new product introduction, business strategy discussions, and customer acquisition planning.

Speaker Change: The markets we play in are big and they hold a lot of opportunities.

Speaker Change: great partnerships make access to those markets easier and more efficient and I believe the time and effort we put into development of close working relationships with our partners pays off exponentially for LSI our agents and most importantly our customers.

Speaker Change: From a business segment perspective, we continue to outpace our competitors in the lighting segment.

Speaker Change: Despite a small drop in lighting sales in 2024, we feel we're outperforming the general market and we continue to believe there's sufficient market share opportunities to support our fast forward plan.

Speaker Change: Our margins and our pricing discipline remain strong in the combination of our agent networks, vertical market focus continues to create growth opportunities for us in the broader lighting segment.

Speaker Change: LSI continues to innovate in the lighting segment and in 2025 we'll introduce an entirely new lighting product lying called velocity. This will expand our ability to serve our customers while offering those customers the very best in performance and price.

Speaker Change: In our display solutions group, we entered 2025 with a strong backlog and momentum that we have gained throughout 2024.

Speaker Change: 4th quarter sales were up 22% versus prior year including the partial quarter impact of

Speaker Change: Sales in our printing digital graphic business were up 9% in the quarter and our display case orders were up over the prior year.

Speaker Change: We anticipate a recovery in our grocery vertical as customers in the segment move forward with in-store refresh programs and while while you offer some new innovative stand-alone case solutions that expand into the salad dressing and condiment sections of the grocery store and see market space.

Speaker Change: 2025 looks to be another year of growth for LSI and the vertical segments we are focused on.

Speaker Change: Our partnerships with our agents, channel partners, and end users continues to create opportunities for both LSI and our customers.

Speaker Change: The LSI team continues to execute well and we look forward to sustained profitable growth.

Speaker Change: With that, I'll turn the call back over to Jim Galeese for a closer look at our financials.

Speaker Change: James.

Jim Galeese: Thank you, Jim. A strong focus on execution and quality of earnings highlights our operating results in fiscal Q4, and together with the strategic acquisition of VMI industries create an active quarter for our company, concluding a prosperous fiscal 24.

Jim Galeese: Sales for Q4 increased 4% to 129 million, including the partial quarter impact of VMI, which was acquired April 18th of this calendar year.

Jim Galeese: Comparable sales were below prior year as a proposed merger in the Grocery Vertical continues to disrupt demand.

Speaker Change: Adjusted earnings per share were 24 cents for the quarter and adjusted e but a 14 million or 10.9 percent of sales consistent with our full year margin rate of 11 percent.

Jim Galeese: Multiple factors contributed to our EBITDA performance led by a higher value mix of customers and applications as well as stable pricing and effective cost management.

Jim Galeese: Q4 generated solid-free cash flow with 10 million, allowing the business to act fiscal 24 with a strong balance sheet.

Jim Galeese: Net debt was reduced to 50 million with a net debt to TTM-adjusted EBIT ratio of one times.

Jim Galeese: For the fiscal year, sales finished at 470 million, with adjusted earnings per share of 95 cents, compared to 99 cents for fiscal 23.

Jim Galeese: Adjusted EBITDA was 51.4 million approximately equal to our record fiscal 23 performance.

Jim Galeese: The full-year adjustity even a margin rate increased 60 basis points to 11%.

Jim Galeese: Free cash low for fiscal 24 was 38 million, again supporting reinvestment and key new product and commercial growth initiatives.

Jim Galeese: Capital investment for fiscal 24 was more than double, our annual spend the last several years.

Jim Galeese: While we enter fiscal 25 with macroeconomic uncertainty, the underlying fundamentals of our key vertical markets remain sound. While demand may fluctuate somewhat during this period, industry plans support secular growth over the next several years.

Jim Galeese: For example, our display solutions backlog for the refueling sea-store vertical is strong entering fiscal 25, reflecting the large customer programs one in fiscal 24.

Jim Galeese: Our project services business, part of our end-to-end solutions model, is Forecaster Row over 30% in fiscal 25.

Speaker Change: and increasing number of refueling seastore programs are utilizing our current project management capabilities ranging from planning to installation and after install support.

Speaker Change: There are encouraging signs for the grocery vertical.

Speaker Change: as display case orders for Q4 increased over prior year for the first time in five quarters.

Speaker Change: Favorable activity has continued in July and August today, with Grocery having a book to bill ratio well over one.

Speaker Change: This suggests the industry is beginning to resume plant store refurbishments as well as committing to the new refrigerant technology.

Speaker Change: QSR Restaurant activity remains healthy with EMI having a solid book of business with multiple key customers.

Speaker Change: The integration of the MI is going very well, and Alan Harbour in team are on pace to deliver a solid first quarter.

Speaker Change: Multiple PMI work streams are busy identifying both sales growth and cost-saving synergies.

Speaker Change: For lighting, fiscal 24 was a solid year with operating income increasing 5% driven by a 200 basis point improvement in gross margin rate.

Speaker Change: Atcheeed on 4% lower sales.

Speaker Change: LSI outperformed the broader industry, reflecting continued active project levels in our key verticals as well as share games.

Speaker Change: Recent market trends in lighting are expected to continue into the first quarter with demand fluctuating by vertical market.

Speaker Change: Overall, quote levels remain steady and pricing is expected to remain stable.

Speaker Change: The quote-to-order conversion period remains lengthened, however, particularly for a large-sized project.

Speaker Change: Margin Management will continue to be a priority in fiscal 25 with material input costs expected to be flat to slightly favorable, new and enhanced products providing improved value, and in many cases reducing costs.

Speaker Change: and our multiple price point offering provides lighting customers the choices to meet specific project budgets.

Speaker Change: The manufacturing workforce environment is respected to remain stable and generate additional productivity improvements in fiscal 25.

Speaker Change: In summary, it was a solid quarter and fiscal year for LSI. We entered fiscal 25 well-position with an expanded solution set to meet our customers' requirements.

Speaker Change: We'll support our commercial efforts with continued strong operational execution and effective margin management.

Speaker Change: I will now turn the call back to the moderator for the question and answer session.

Speaker Change: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press start too if you'd like to remove your question from the queue. For participants use the speaker equipment, it may be necessary to pick up your handset before pressing the

Speaker Change: One moment please, while we poll for questions.

Speaker Change: Our first question comes from Aaron Spachalla with Craig Hallum Capital Group.

Speaker Change: please proceed with your question.

Aaron Spachalla: Good morning, Jim and Jim. Thanks for taking the questions. First on C-store refueling, you talked about the strong backlog, and we've heard all activity levels in that market have been highest in decades. Could you just give an update on a couple of the larger projects you have there?

Speaker Change: You know, where are we at in those deployments? What's the timeline to get those completed? And I know a lot of that market is kind of normal course of business for you But how does how does the pipeline look there?

Speaker Change: Hey, Aaron. Good morning. Jim Clark here. Thanks for thanks for the question. Thanks for calling in.

Speaker Change: Well, you know, we're very strong on the seastore side. We had been awarded a number of awards through

Speaker Change: The last half of 2024.

Speaker Change: and I think that we've talked about this before. These are all multi-year projects. These are thousands of locations and, like we've talked about, the content way we deliver to these section of customers that we have.

Speaker Change: It's typically, you know, hundreds if not thousands of sites.

Speaker Change: It is a refresh cycle that we see historically had been you know seven to ten years now much more compressed down around the five year and even three to five in some of the smaller markets.

Speaker Change: So, you know, answer your question. We are, you know, these markets, these projects will go on for well into 26 and we have two large projects that are making up awards that we had come out of 2024 with. So backlog looks very healthy in that regard.

Speaker Change: Alright, thanks for the color there. And then second, on the R290, you noted initial shipments started in the fourth quarter. Several large customers have stated their intent to fully convert.

Speaker Change: You know, can you just talk about what this business could look like for you as that happens and maybe just talk a little bit about the competitive landscape and your value proposition there?

Speaker Change: Yes, so first of all, from a competitive standpoint, we think we're ahead of the curve from a lot of our competitors, particularly in the format of the units that we're delivering. We have been in discussion with our customers about this.

Speaker Change: Up for it.

Speaker Change: Perhaps a year relative to our engineering, our approvals, our opening of our factory, our ability to deliver, and that manifested itself in orders in Q3 and then actual deliveries in Q4.

Speaker Change: I think that generally in the marketplace there have been a number of press releases of different companies stating their intent to use R290 as a part of an environmental program and the opportunity to offset.

Speaker Change: you know, harmful fluorocarbons that are emitted from more traditional.

Speaker Change: We think that this will continue to pick up.

Speaker Change: We believe that it will exceed our normal pace of our standard refrigeration units and it's just a matter of can we overcome the drag in the slow down in grocery in general.

Speaker Change: to see that benefit in the R290. Either way, I'll just mention it now because I'm sure it's likely to come up in a question.

Speaker Change: You know the grocery market [inaudible]

Speaker Change: The potential merger between two large players remains kind of an open item right now are

Speaker Change: Our latest intel indicates that...

Speaker Change: It's likely to go to trial here at the end of August into the beginning of September and likely at least in this first stage have some resolution as we come through September towards the end of September.

Speaker Change: When that does get resolved, we do anticipate a pickup in general story models across the entire

Speaker Change: Segment in grocery, not just the two that are involved in the merger.

Speaker Change: So with the combination of the R290 desire to move to that plus some pickup in general grocery store orders we anticipated could be very robust year in that category.

Speaker Change: Alright, thanks for that, and then maybe last for me, I know we're only a few months into it, but on EMI, you can just talk about how that integration is going, what are some of the early things you've learned about that business and then just how are you feeling about progressing towards the EBITDA Marching goals that you've put out there.

Speaker Change: Yeah, so we, as you know, we closed EMI in April, so they've been on board with us, you know, for a few months now. The integrations going very well, culturally they're a great fit.

Speaker Change: Alan Harbohel, who is over there.

Speaker Change: running that business along with a couple other folks have been a pleasure to work with, have integrated well with us. As you know,

Speaker Change: The margins are a little bit from a percentage standpoint, the margins are a little bit under our performance.

Speaker Change: and we knew that going into that. We see that as a great opportunity for us to bring our operational discipline and the procurement and a number of other things that we can offer to them.

Speaker Change: and the summary is, I think it's been going very well. We have a strong backlog looking through the, you know, the partial stub we had with them in Q4 and what is developing here in Q1.

Speaker Change: So we're very happy. We're happy with the progress and you know we're being as aggressive as we can in terms of moving things forward and they've been very receptive to our input so I'm very pleased with it.

Speaker Change: But I do want to say one, I do want to just hit one other thing that I'm thinking about it and I know we've talked about it.

Speaker Change: When we talk about it, when we, when we acquire a DMI.

Speaker Change: from a percentage standpoint, you know, they do lag LSI, the dollar standpoint obviously be accretive, but from a percentage standpoint, we've got what we see is opportunity there.

Speaker Change: We're going to use the disciplines and the things that we've done to improve Ellisize performance and JSize performance and we're going to apply those to EMI so we will move that up.

Speaker Change: and we're excited about that. But there is a drag created in an absolute, you know, percentage type of analysis, if you will. We look at it as a great opportunity for good cross-selling. The customer base is, you know...

Speaker Change: We kind of fall into this thing. We talked about it before, a third, a third, a third, a third that our new customers to EMI, a third that are new customers to LSI, and a third that are current customers. And we've already had a number of those meetings. And I got to tell you.

Speaker Change: EMI has done an outstanding job of introducing LSI to their customers.

Speaker Change: I'm now holding a bar under the LSI people to be as good as the introductions that EMI has made. So we're very encouraged by it.

Speaker Change: Yeah, it's good to hear, and I thought the, you know, almost 11% EBITDA margin was particularly impressive considering the partial quarter of EMI, so thanks for the questions. I'll turn it over.

Speaker Change: Our next question is from Annette Dael with H.C. Wayne Wright. Please proceed with your question.

Annette Dael: Thank you, good morning everyone. So Jim, just following up on your comments about margin improvements and sort of the time it might take you like what should be sort of the expectation you can set around.

Annette Dael: In a timeline, is it like another, you know, year before you can, you know, sort of fast show some of these margin improvement efforts to EMI or maybe even faster than that?

Speaker Change: I mean, we're certainly trying to press it at the speed, you know, we're cognitively aware of any delusion that it happens, you know, from a percentage standpoint, like I said from an absolute dollar standpoint, it'll be

Speaker Change: but it will be diluted from our percentage, you know, our past performance.

Speaker Change: We think that we can get this all accomplished in 18 months and now the goal is how what do we do? How quickly can we work to make this happen within a year?

Speaker Change: So that's kind of our internal operating, that's operating rhythm, that's what we laid down as a...

Speaker Change: as goals, you know, both internally LSI and

Speaker Change: EMI and you know it's just a matter of getting its culture right it's all about culture we've talked about it before particularly here at LSI.

Speaker Change: We don't want to do it in such a way that it...

Speaker Change: James Galeese. We're likely we want to move it.

Speaker Change: you know, along much faster than, you know, than they're probably prepared for, so it's always going to be some type of compromise, but...

Speaker Change: I think that at this point, to be at the level that we're performing, which is 11% knowing that we're going to 12 and a half, it's going to take 18 months is what we're thinking right now.

Speaker Change: Any sort of sense about how this might change over the next year even as you...

Speaker Change: or maybe look at more resources to the sales side of things. Just curious to see if there is more operating average from existing resources or within the adding.

Minusum Makas: Minusum Makas on the S.G.N.S.A.D.

Speaker Change: I mean, I would say that in total if you were to kind of look at it, if we were looking at it is a year from now, I would say you would see minimal impact in terms of SGNA, but there could be some lumpiness as we move through different things and we want to accelerate things.

Speaker Change: I've talked about this before that it's always to me the investment is always like an accelerator it's like a gas pedal

Speaker Change: We're going to use more gas, but we're going to get there a little bit faster, so it's always that trade off.

Speaker Change: I think right now, as we look at it, you know, a year down the road, we don't see any, we're not looking at any big swings or anything like that, but you may see quarter to quarter of us making an investment or making a change that we absorb the cost before we get the benefit.

Speaker Change: on the lighting side, the margin improvements are these primarily coming from higher prices we may have implemented.

Speaker Change: I mean, we've always been, you know, we're price zealots from a management perspective, you know, we want to make sure we get paid.

Speaker Change: for what we're doing. We want to make sure that we are able to

Speaker Change: Provide that value to the customer that they see the extra on an absolute dollar standpoint or it was worth the investment.

Speaker Change: I wouldn't say that we've been moving prices around much over the last

Speaker Change: You know, a quarter or two, but we continue to look for ways of manufacturing efficiencies, operational efficiencies, those type of things that continue to allow us to manage margin and ebit out performance.

Speaker Change: and the question has been asked before, and I'll just say, you know, how far are we through that journey?

Speaker Change: We're still in our minds we're still in the you know

Speaker Change: Second, maybe third inning of that we've still got things we can do and we don't see us exhausting those things anytime soon.

Speaker Change: You know, our discipline around cash remain, you know, very high to us. We, you know, our leverage ratio is 1x right now, 1, 1, 1x.

Speaker Change: you know all the fundamentals of how we run our business remain in focus for our team and like I said the EMI team has been fantastic they understand the priorities they understand.

Speaker Change: The difference between operating a public company environment and a private company environment and all the choices we make are all tradeoffs about that speed in which we're able to you know realize and improve their margin performance and how quickly we're able to get in front of customers and

Speaker Change: You know, it's very, it's, it's, it's often very tempting to make, you know, press harder on the gas pedal and I think we are going to do some of that. But the payoff is going to be there and I don't think that there's anything disruptive in our future.

Speaker Change: Mr. Jim Convert from the Strong Resource, that's all I have. Thank you. Thank you, Ahmed.

Speaker Change: Our next question comes from George Gianarchus with Canacor Genuity. Please proceed with your question.

George Gianarchus: Hi, good morning. I'd like to ask a little bit about the comments you made on book to bill improving and your grocery vertical and additional details you could share there would be appreciated. Thank you.

Speaker Change: Yeah, I mean, I think the comment specifically was our orders rate increased for the first time in five quarters in our refrigerated products in some of our display solution sales and it's specifically around.

Speaker Change: Grocery, as we've talked about over the last year, the grocery market has been impacted broadly for us and it's mostly around art thesis, it's mostly around competitors seeing what the evolving market is going to look like and do they need to compete against.

Speaker Change: But we've also said that we thought that there was a kind of a terminal proposition to being able to stand on the sidelines.

Speaker Change: and what we've seen is a pick up in a willingness of a number of our customers to start investing and you know we hope it's an early sign of you know of a cascading period sequence of events that just kind of opens up that market again.

Speaker Change: We don't feel as though the market is under any pressure relative to a change or a shift into more conservative investments or anything. We just think we've used word pause and we think that's kind of what it is representing.

Speaker Change: and the word that I'd start using now is maybe that purchasing starting to resume. So, you know, first quarter and five quarters and we're very happy about that.

Speaker Change: and George, you know, I think we mentioned that, you know, that has that positive activity has continued through, you know, July of August to date as well.

George Gianarchus: Great. Thank you.

George Gianarchus: Our next question comes from Rick Fierran with Accreditive Capital Partners. Please proceed with your question.

Rick Fierran: Good morning, Jim and Jim, and I can grasp in another solid quarter. I'm happy all this I knew you're.

Jim: Well, thank you Rick, thanks for calling in.

Rick Fierran: Absolutely, just a couple questions.

Rick Fierran: He talked about 25 plus new products and I was wondering if the pace of new product introductions, you know, such as the velocity line has accelerated and if so, if it's fair to say there's a new normal emphasizing product growth and innovation.

Speaker Change: Yeah, you know for anybody that's you know, you have following us for quite some time our benchmark has been

Speaker Change: you know 20 plus new products a year and it's you know those new products can be new technology and new performance requirements they can be cost out initiatives they can be performance improvements and it's a combination of those the truth of the matter is the number is actually on every year over the last [inaudible]

Speaker Change: 5 years it's actually been higher than our stated rate but it's really about how we're able to roll them into the market and what the adoption and the pickup is and like any new product that comes into the market. There's a learning curve.

Speaker Change: So that's what we always look at is how quickly can that pick up a curve. We know what we do from a technology standpoint. We know what we do from a speeds and speed standpoint. It's just how that value is translated to the customer.

Speaker Change: So, you know, we are we always look at it is what we call vitality, right? You know, what how much of the how much of our sales are in that new product and I have to tell you that.

Speaker Change: Introducing, you know, having 20 plus new products, 25 plus new products a year has given us a 30 plus percent vitality rate in new product introductions and it's been it's been key to our growth and it's something that we're going to continue to move forward.

Jim: And Jim, do you anticipate that also sort of having a longer term impact on gross margins and with these new product introductions, do you see, you know, pick up.

Jim: I appreciate the fact that the new products relative to the existing swedle products is still a nominal amount, but over the long run is that it can improve gross margin?

Speaker Change: Absolutely, and I think that the difference is the thinking now versus maybe five years ago is the full cycle of that introduction of a new product and it's more than just the

Speaker Change: The technology that's in the product, it's the manufacturer ability of it, it's the standardization of parts.

Speaker Change: It's, you know, performance related items outside of

Speaker Change: of speeds that are things like operational life cycle and things like that so all of that has become a mindset within our product management group, our engineering group, our sales group and the overall value of these products is just as much higher.

Speaker Change: then maybe what we would have looked at 10 years ago.

Speaker Change: six years ago, something like that. So we do

Speaker Change: I think that there is...

Speaker Change: A lot of room I just brought it up a few minutes ago that operationally we believe there's still

Speaker Change: in Margin Expansion Opportunity, and we think...

Speaker Change: that these new products create a higher value that we're able to continually you know work with pricing and I mentioned it where the customer can see the value far beyond just the acquisition cost.

Speaker Change: to move from product to a solution.

Speaker Change: and you know that's what. [inaudible]

Speaker Change: That's the conversation we have with our customers, and that's how we...

Speaker Change: Differentiate ourselves from our competitors.

Speaker Change: or it's a catalogue sale versus a...

Speaker Change: You know, it's Lucian and Sal.

Speaker Change: and what we hope, at some point our customers, our salespeople, our partners are all able to see it as kind of an integrated solution as opposed to individual components and to them.

Speaker Change: Jim understood I used to add it end-to-end here, yeah.

Speaker Change: [inaudible]

Speaker Change: Yeah, that makes a lot of sense. And I imagine there's that sort of less quantifiable more sort of subjective

Speaker Change: is a strengthening of the customer relationship that occurs when you're starting to expose them to things they hadn't seen before. Stickier relationships.

Speaker Change: Yeah, well we've always operated under this philosophy that you know people essentially buy from people they buy from people they trust

Speaker Change: When you're introducing new products, there isn't a history behind it. There isn't.

Speaker Change: you know the operational application is incompletely understood.

Speaker Change: So there's a certain amount of trust that a customer or an agent or a partner or a partner.

Speaker Change: will have in us as a supplier as a solutions provider and say okay well we don't have a long history with this product.

James Galeese: James Galeese James Galeese

James Galeese: You know, that's the position we're always trying to put ourselves in. More than just the supplier, we're a partner. We're able to help them with the business decisions they're making. And we're trying to engineer products. This is the whole thesis around that vertical market that adds value to their business.

James Galeese: and so it's not just a, you know, a...

James Galeese: are required by a compliance buy or something like that. It's something that they see that adds value and makes their customers see higher value in purchasing from our customers.

James Galeese: So we you know that's always been our our thesis

Speaker Change: makes a lot of sense. It's family, you're helping family. So are there other areas? Yes,

Speaker Change: I was going to ask regarding margin improvements, the areas where you see some excess capacity and I imagine that's...

Speaker Change: you know clearly on the grocery side but areas where it's grown through zooms especially the grocery vertical where you see margin improvement just just by picking up unused capacity.

Speaker Change: Well, absolutely. You know, as a manufacturer here, you know, particularly as a U.S. manufacturer, I mean, and as operators, we always look at, you know, our utilization rate.

Speaker Change: and you know, we're able to, and this is discussions internally all the time, if we're able to perform to this level in our utilization rates aren't where we want them to be meaning that we have, we can go higher.

Speaker Change: You know, just imagine the returns that come from that.

Speaker Change: Remember, we have a long-range goal as part of our fast forward to playing to be at 12.5%.

Speaker Change: We've finished at 11 right now. I've always said there will be some variation to that. I don't want anybody to get stuck like if we move from 11.3 to 11.1 that the bottom is falling out or something.

Speaker Change: It's all about that acceleration, it's about utilization, it's about investment, it's about experimenting.

Speaker Change: you know, with ways that we can manufacture more efficiently, that we can buy more efficiently.

Speaker Change: and within that we know the long range goals that we're after and I think that historically we're proving our ability to kind of continue to make that vertical progress to move things up and you know really get a return on our net assets and keep that as a very important element.

Speaker Change: and the other thing that I'll say is

Speaker Change: In our management meetings, there are people, there are commercial experts, there are people that are operations and engineering experts.

Speaker Change: But what we do is we've taken the time over years.

Speaker Change: to make them functionally functional experts in terms of finances and what their decisions mean and how they impact the finances so that they understand

Speaker Change: They're never lost as to why things are moving up or moving down or moving laughter, moving right. They understand their decisions and how they impact our returns, our investment rights here, our profitability, all those type of things.

Speaker Change: It's just a, you know, it's kind of an operational management cadence and we bring everybody along.

Speaker Change: It's really helpful, thanks. I happened to fall into the camp of envisioning some floodgates opening as the grocery.

Speaker Change: Merger gets resolved one way or the other whether whether it goes forward or not I just you know personally you know our beliefs is that there will be a lot of business and so [inaudible]

Speaker Change: You obviously have to be prepared for that. I know that you, you know, because the grocery vertical has been, you know, for the past four quarters not the strongest is coming back despite the kind of rooming. [inaudible]

Speaker Change: you know resolution of this merger but do you see like any bottom potential bottlenecks or do you feel that you've you've got the capacity if the floodgates as I think may happen. In fact the floodgates do open.

Speaker Change: Yeah, no, I mean, and I think I mentioned it in my opening comments here that...

Speaker Change: you know from a from a fixture standpoint from a technology standpoint specifically.

Speaker Change: In refrigeration we open a new facility and you know we're not opening it to meet current demand we're opening it to meet our that's why our fast forward plan and our management team and our people understanding where we're going is so important because we're designing around that right so that we have that capacity and we have the ability [inaudible]

Speaker Change: I also mentioned investment in our electronics manufacturing you know that is something when if I look back six years ago we had excess capacity today we need more capacity and so we made that investment not investments not to meet current demand that investments made to meet that future demand in those [inaudible]

Speaker Change: Long Range Targets we have. And then the last comment I'd make about that is, you know, again, if I look back six years ago, we had excess capacity that we trimmed, but we didn't trim it.

Speaker Change: to meet that current demand. We trimmed it with that expansion and that ability to grow and so we've always held that capacity, that capability in hand knowing that again, where our 2028 plan is.

Speaker Change: So it's always that balance of not, you know, having more than we need, but certainly never having less than our goals on our targets are. And I feel

Speaker Change: Very confident that we could frankly, I feel like we could meet almost all of our requirements for 2028.

Speaker Change: Today, through the efficiency we continue to gather.

Speaker Change: and I was just walking the shop floor yesterday here in Cincinnati with the operations team and I was asking them to kind of picture where we are today versus same facility, same layout.

Speaker Change: Same Square Footage [inaudible]

Speaker Change: and the operational efficiency that we've been able to gain if we ever broke it down we don't break it down this way but if you were to think about you know effectiveness per square foot it's easy for them to see that that efficiency and that effectiveness that they've been able to bring in and it's just

Speaker Change: It makes me smile when we walk around the factory floor and we see that we see where we are today but we also see where we can be tomorrow and we've got plans to get there.

Speaker Change: That's awesome. Thanks for that description that's hopeful. So my few questions turned in a few more but this is the last one I promise and it's just a regard in the M&A pipeline and how things are looking on that front.

Speaker Change: I'm going to answer that in a second because there's one other thing I was just thinking about in terms of efficiency and I mentioned it.

Speaker Change: in my comments, but our center of excellence we've made around some of our print solutions and some of our digital solutions has also been extraordinary and we've been able to do that, you know, while we had some

Speaker Change: We had the capacity to meet our customers demands. We were able to marry it up with some kind of slowdowns as we know we were talking about the grocery market.

Speaker Change: James Clark, James Clark James Clark.

Speaker Change: to our position in the market.

Speaker Change: and I mentioned in my opening comments, the Center of Excellence weave.

Speaker Change: created mostly in Houston where we took and we re-oriented some of the

Speaker Change: Work we were doing in Northern Ohio and reoriented that down to Houston and the efficiency we got out of that are really remarkable and I'm very pleased with the way we did that and it would happen kind of seamlessly to our customers and we're always making sure that we can do that.

Speaker Change: So I'll pivot into the question about M and A.

Speaker Change: You know, like I said, we're at, you know, one-time leverage ratio right around there. Our ability to generate cash remains healthy. Our plan to kind of settle the debt that we brought on for EMI is all well thought out.

Speaker Change: and so we remain very active in the M&A space. And I mentioned it before at least from our perspective. I'm not trying to talk about the broad market but from our perspective.

Speaker Change: The Conversations

Speaker Change: with people that we're talking to from an M&A perspective.

Speaker Change: are much more grounded today. They're much more willing to sit down and not just talk about their current performance.

Speaker Change: but where they think their performance is going to be and every sim still comes with a you know with a massive hockey stick in terms of growth every personal relationship we have we try to work very hard about self originating our own deals.

Speaker Change: all of those conversations. I feel like there's a real level setting that's occurred over the last.

Speaker Change: 12 to 18 months and continues right now where people are not only willing to do.

Speaker Change: James Galeese, James Clark James Galeese, James Clark

Speaker Change: and I'm very pleased with our pipeline and I'm very pleased with the conversations that are occurring in those pipelines and I also don't feel like

Speaker Change: You know, deals have to be made in a minute because I think that those deals that need to be made in a minute are we don't discover and we don't have the opportunity to plan and they're not a successful long term.

Speaker Change: I mean, even though they can be successful, they just don't have the same velocity that we're able to create when we're able to look and see how culture is going to fit in and how they're forward planning is going to fit in. So, if I were to talk about R-M-N-A environment right now,

Speaker Change: I think it's the best we've had since I've been here.

Speaker Change: That's exciting. Jim, it sounds like you're not looking for a good seller, you're looking for a good partner. Yes, thanks for thanks to you. Jim and Jim, Andrew team for the great work. Appreciate it.

Speaker Change: Thank you.

Speaker Change: We have reached the end of the question and answer session. I'd now like to turn the call back over to Jim Clark for closing comments.

Jim Clark: I would say it was a very active Q&A, so I don't know if I have a lot of additional comments I want to leave. I will say this that I think everybody that's on this call is very aware of market disruptions and the headwinds and all of those things.

Speaker Change: and what are most proud about from a team environment from an LSI as a company is it?

Speaker Change: despite those headwinds, you know.

Speaker Change: We were able to perform financially, we were able to perform for our customers, we were able to perform for our shareholders, and we were able to perform and keep our employees engaged and busy, and I think the future looks very bright for us.

Speaker Change: and I'm excited about, you know, the first quarter and five where our order rates picked up and I expect

Speaker Change: You know, much more to come. So thank you for continuing your interest in LSI, the people that are here, our customer segment, and I think that we've got a lot more left to deliver with that. I'll say good afternoon.

Speaker Change: This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

Speaker Change: James Galeese, James Clark

Speaker Change: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark

James Clark: James Clark, James Clark