Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Q4 2019 LSAG Industries Inc. earnings Conference call. At this time, all participants are in a listen only mode with us from the company today are Mr., Jim Clark, President and Chief Executive Officer, and Mr., Jim Gliese Executive Vice President Chief Financial Officer. During today's conference call. We will host a question answer session and instructions will be given at that time, if at any point during our conference call. Today, you require operator assistance Press Star then zero an opera will be happy to assist you. As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure hand, the conference over to Mr., Jim Gliese Executive Vice President Chief Financial Officer, Sir you may begin.
Good morning, everyone. We issued a press release before the market opened this morning detailing our fourth quarter results in conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website.
Www Dot l. aside the Industrys dotcom.
Information contained in this presentation will be referenced throughout todays conference call.
I would like to remind you that managements commentary and responses to questions on todays 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 mornings press release as well as our most recent 10-K.
Today's call will begin with remarks summarizing our fourth quarter results at the conclusion of these prepared remarks, we will open the line for questions.
With that I'll turn the call over to Jim Clark.
Jim. Thank you good morning, all let me start this morning with a few highlights I'm encouraged by our fourth quarter results as they reflect the initial impact of our management priorities and overall organizational and team focus sales of 81.5 million and adjusted EBITDA of 3.3 million were just below prior year and a stair step improvement from Q3.
Overall sales performance was down 2% to prior year, we continue to close the gap.
We had a very strong order book in Q4, which was better than a 5% improvement over prior year and allowed us to exit the quarter with an increased backlog.
We had a solid balance sheet performance and execution for the quarter with free cash flow of $4.8 million as we continue to further reduce our debt by 4.3 million, bringing us under 40 million in outstanding debt.
This is without the proceeds of the new Ranger said facility sale, which I'll comment on about a minute.
Jim believes will provide more information regarding the financials overall.
With the financial overview in mind I want to share some more specifics and provide comment on our go forward short term strategy.
As I mentioned previously our short term strategy is focused on outdoor lighting in our key vertical markets, where we bring a differentiated offering and solution, including graphics in indoor lighting to our customers, allowing us to enjoy a competitive position and drive higher margins.
We do prioritize our outdoor lighting and that drives a better quality of earnings, but we remain committed to bringing a full solution to our customers.
It gives us a competitive advantage and differentiates us as a supplier.
Our sales team has embraced this focus on higher value performance based market applications and we are collaborating closely with our agency partners to bring these solutions to our end users.
As a result of this focus we did see some nice project activity in our key lighting verticals, including petroleum automotive QSR and our overall outdoor lighting in the fourth quarter.
We plan to continue to capitalize on this momentum.
Turning specifically to graphics, our project activity in the petroleum segment remains high.
As we are currently managing five key programs involving both new and existing customers momentum is very positive here.
Several of the programs are at the early stages of their lifecycle and they are pressing our capacity as pilot and startup runs are disruptive, but the operation team is managing this well.
Our expansion into match, Mexico has slowed a bit in Q4 as the oil companies are having a difficult time, keeping up with the petroleum demand at these new converted sites.
They simply Didnt expect such high demand and they are not able to provide an of gasoline to these new sites.
This is good news for all of US in activity is projected to increase again in fiscal Q2.
On the branded and other retail print graphics business, primarily led by grocery and farmer, we continue to evaluate the best position to be in this segment as it undergoes changes.
A number of our current print customers are taking a closer look at digital graphics solutions as a replacement to print and we're happy to be at the table in these discussions.
Our digital graphics business continues to perform well, it's underpinned by our position in QSR, it's small.
But we do feel well about it.
It's subject to swings in project demands and we continue to learn and adapt as this vertical grows.
Lastly, in the stock and flow segment, we had a reasonably good quarter again, driven by improved focus and priorities, particularly in sales activities Im happy with the team we have in place and I'm confident they will continue and improve their position.
Overall I'm encouraged by our commercial efforts, we continue investing in our sales and commercial team and remain committed to strengthening our commercial activities.
With increasing training education across all fronts, we have a full schedule and a full agenda coming into the year for training for our partners agencies and distributors among others.
This will help drive our emphasis on high performance applications and solutions.
I do want more improvement on our gross margin levels I know, we can do better. The good news is our order book is beginning to reflect the improved mix and subsequently better margins. This won't be a quick turn but our focus is shifting and we can see the opportunity ahead.
Let me switch and comment on product development and engineering.
I am happy to say our focus on specific applications is rejuvenating, our new product roadmap activity in several new projects are scheduled for release in the second half of the 2020.
The engineering team has embraced the program to reduce our speed to market, while improving our overall product quality. This coupled with our strengthened marketing position and product road mapping functions will accelerate our roadmaps I also want to mention that when I say second half of 2020, I mean, our fiscal half.
On the operations front, our team has completed the transfer of the new wins or production to our blue Ash and independence, Kentucky locations.
We proactively scheduled our lead times to be several weeks ahead in June and July to startup and help us with the startup process. All new lines are projected to be up and running in a pre move levels by the end of September .
The consolidation provides numerous benefits, including improved capacity utilization.
Lower overall base costs in annual cost savings that we've talked about in prior calls.
The move did have an unfavorable impact on margins in Q4. However.
Lastly, I want to mention that our operations team is dedicating considerable time to improving our supply chain and thats reflected in overall inventory lower costs and inventory.
In regards to the approximately $12 million sale of our new Windsor facility. The town of new injure was required to approve the sale of the property before close.
This process took a little bit longer than we had hoped for however, I'm pleased to announce that the town did approve the sale on August 8th.
And we anticipate to close the sale by the end of September .
In summary, I'm encouraged by the evidence and progress validating our management agenda is on the right path fiscal year 2019, with significant change and disruption to the business, but we are exiting with a much clear direction and set of priorities.
Work remains for our business to achieve that performance expectations, we define for ourselves for 2020 and over the next several years.
But momentum is building the team is committed to achieving the balance required for successful high performance business and I'm encouraged with the progress we've made so far.
With that I will turn it back over to Jim Gliese for a deeper look at our financials.
Thank you Jim I'll be providing comments on our financial performance on a non-GAAP basis for comparability purposes, and then highlight the non-GAAP items, which reconciled to reported GAAP performance.
Let me start with key financial Statistics total fourth quarter sales were $81.5 million or 2% below prior year.
Adjusted EBITDA was $3.3 million versus $3.6 million in the for the fourth quarter 2018.
Adjusted operating income of 828000 compares to adjusted operating income of $1 million for Q4 of the prior year.
Fourth quarter GAAP reported earnings per share were three cents versus a loss of 10 cents a share reported last year.
2019 fourth quarter GAAP earnings per share includes a net favorable effect of three cents. The result of the tax effect related to the expected sale of our new Windsor facility, partially offset by restructuring costs.
GAAP results contain restructuring costs of approximately $1 million for the quarter.
The company exits a year and a net tax benefit position.
A complete reconciliation of Q4, GAAP and non-GAAP measures is contained in our press release and 10-K.
The balance sheet continues to improve.
With fourth quarter free cash flow of $4.8 million and debt reduction of $4.3 million.
The business exit fiscal 19 with debt under $40 million, finishing at $39.5 million.
EBITDA and a sequential decrease in working capital from Q3 contributed to the 4.8 million cash flow.
Local government has approved the sale the new Windsor facility with the closing projected to occur by the end of Q1.
Proceeds of the sale are projected to be approximately $12 million.
The transaction will have no tax effect in fiscal 2020, with the capital gain offset by existing long term capital losses.
A regular cash dividend of five cents per share was declared payable September 12 for shareholders of record on September Threerd.
Next I'll briefly comment on the performance of our two reportable segments, starting with lighting.
Sales of $57 million or 7% below last year sales were soft in several verticals in the project channel, while the stock and flow channel had a good quarter.
Also important to note that sales were constrained by approximately two points due to the new wins or production transition.
A number of orders were proactively rescheduled to July to more effectively manage the transition.
Lighting gross margin was 23.4% unfavorably impacted by lower sales volume in our higher margin verticals and startup costs related to the new wins or production transition.
Lighting order levels for Q4 were high single digits above prior year, reflecting improved intake levels for key verticals, including petroleum and automotive as a result backlog for the end of Q4 is above the same period last year.
The lighting segment is generating positive price realization from the May price increase offsetting any tariff impact.
Lower operating cost served to offset the lower margin rate as a result, adjusted operating earnings for the quarter were 2.7 million with adjusted EBITDA of $4.5 million.
Or 8% of sales.
Shifting to Grafix Grafix sales growth, 11% was driven by the petroleum segment, which increased 13% versus a good quarter last year.
Momentum remains strong for the petroleum segment with a full slate of program schedule with both existing and new customers.
Graphics segment gross margin and earnings improved sequentially from Q3, but were below prior year.
Earnings were impacted by project mix and the unfavorable impact of several one off adjustments, including a write down of capitalized software as well as end of program customer specific inventory.
Adjusted operating earnings were 762000, and adjusted EBITDA was $1.2 million or 4.8% for the quarter.
I'll now return the call back to the moderator.
Thank you, Sir ladies and gentlemen at this time, if you would like to ask a question over the phone. Please press star and then one on your telephone keypad. If your questions have been answered or you wish to move yourself from the queue simply press the pound key and our first question will come from the line of Craig Irwin with Roth Capital Partners. Your line is now open.
Hi, good morning, and thanks for taking my questions.
So Mr Clark Youre.
Your comments in the prepared remarks about backlog seem to point to.
Potential for us to see a return to growth.
Early in fiscal 2000, do you think it's possible we'll see.
First fiscal quarter up over the prior year levels.
Hey, Greg Good morning, and good to hear you on the call I mean, certainly if you look at Q4 as I mentioned, we were down 2%, but you know thats quite a gap closure from looking at Q3 and kind of historic performance I, certainly anticipate that we will be up.
In Q1 and Thats our goal.
Obviously, we have some seasonality to our business outdoor lighting that type of thing. So there's a number of things there to balance, but our goal is definitely be up.
Great that's good to hear.
Next thing I wanted to ask is about the impact of the new wins or transition during the quarter. So you did say that the negative 7% we saw.
In lighting was impacted by about.
Two full points to two full percentage points.
From this transition can you maybe frame out for us what at what it would have been sort of from a margin perspective now what we have seen a benefit from higher utilization on are these potentially yes. Some of your more interesting margin product projects that.
That were pushed into the into the fourth fiscal quarter.
All right, let me break that down into a couple of different answers I'll kind of go backwards New wins, you is primarily indoor lighting. So the transition relative to new Windsor was just the disruption that occurred in the.
In order to make up for that and shutting down the factory moving through the year.
We absorbed overtime and task the organization here to get our workflows in a transfer is up at his quicken pace as we could so obviously that had some impact overall impact on the business.
The stuff that.
That the projects that we moved or the products that we moved our lower margin product. So.
You know the idhone anticipated that getting those up and running is going to have a big impact on margin.
And then.
Overall, it's mix shift right it's.
The more we do outdoor the better our quality of our earnings are the better we do so it's really a commercial effort as opposed to the new wins are close.
Great and then just to check on the on the $12 million in cash you mentioned previously.
He would probably use that to pay down debt is is that still the intention now once you have the cash and bank.
Absolutely.
Yes, I mean I think that.
Im very happy with the with what we've been able to contribute in the fourth quarter. It's nice that we've come under 40 million our ratios at 2.7 now.
And I anticipate that that will come down even further we will obviously mathematically come down further when we apply the proceeds but.
And ticket to key focus and I'm very happy with the progress we're making.
Excellent and then another thing you mentioned that I found interesting was the progress at Atlas.
The market leader.
Did not report the same kind of positive progress on quarter.
You guys are obviously outperforming there can you maybe give us a little bit more color is this the.
The transfer of.
Traditional Alan sides is over to Atlas, that's helping it basic blocking and tackling.
And can you maybe clarify for US do you feel like you outperformed the market.
During the June quarter over want less.
Yes, so I can't comment about what the market was doing specifically.
In terms of competitive position against Atlas I mean, I'm only I can't comment only because I wasn't really.
Tracking that closely I think that as you know we hired a new president down at Atlas, we have been making an investment in the commercial efforts down and out listen and frankly, most of our progress has simply been us getting back out in front of our customers. They like the product I think that Atlas has a good recognition of brand recognition in the market.
They have a good quality product and it was really the service component being out in front of them that helped us quite a bit.
Excellent and then last question if I may.
EBITDA margins are continuing to improve.
No.
Off the bottom in the last couple of quarters.
How do you feel about the potential for EBITDA margins to continue to firm over the next number quarters. Obviously this is a focus on something that you really you know.
Committed to achieve but yes, it's something that's going to happen in fits and starts do should we maybe expect this in the first quarter.
And do you have any internal targets for the end of the year that you might want to share with us.
Our our goal is always to you know to make this is linear as possible and avoid those fit those stops and starts but market timing.
In terms of the demand seasonality with our products.
All those things have an impact on it but I mentioned in my remarks, a little while ago, it's about the quality of earnings in the the more we have outdoor.
The better our earnings are the more we connect our projects with Grafix a better earnings are the more we leverage our digital signage with outdoor the better our margins are so it's really about shifting and making sure that we have the stickiness from this on this strategy component, which is listen let's lead with outdoor let's make that our differentiated offering lets make our customers aware that thats, where we compete.
You know almost.
Exclusively relative to the products that we have.
We believe there is some great differentiation in those products. We believe that there is some great differentiation in the way, we are able to package lighting and graphics together and when our customers buy into that and when they see that value, we all benefit and it turns out that our margins and EBITDA improve.
I would just say this craig that our goal is obviously to continue to improve them, but this is a long road. This is not what I want to avoid is is that we do have a lot of those stops and starts and im not pressing that change. So that we know we have a.
And the impact to our topline, but our margins improved but were not able to overcome the drag because we missed on our topline. So it's good to.
So it's a journey.
Excellent well congratulations on the progress we will look forward to watching this journey continue.
Hello. This is the right direction as it has been.
Thank you.
Thank you and our next question will come from Joseph Osha with JMP Securities. Your line is now open.
Hello, everybody.
Good morning.
Hi.
Following a little bit on on Craig's question, you have spent a fair amount of time and this this came up and white fair.
Reconfiguring your sales and your marketing and obviously, you've you've you've made some progress there but.
How how should I think about what is what's left to show up as a result of that organizational effort.
I think we're on the beginning of it I mean, I think that this is a cultural change and you know you when you're changing the culture of the company.
It happens slowly right you don't put too much pressure on it you break the organization.
You you put but you do put steady and solid pressure on it. So I think we're in the beginning stages of this kind of transformation.
I think theres a lot of opportunity and it extends not just on the front end, but it extends in the back end too and we are.
We are meeting with our agencies our partners those type of those type of relationships are so critical to us.
We're we're educating them as we go along too and I made a specific comment in my remarks, there's training programs. There is awareness campaigns. There is arming them in in teaching them and educating them about what differentiates atlas compared to the others and as we do that and we get we continue to get traction. We continue that improvement so as I was saying to Craig It's a journey.
In it.
I think we're at the beginning of it.
Okay, and so let us following that let's imagine that it's it's two years from now and I'm looking at these bar graphs here on page five and page six and in particular I'm looking at lighting segment sales and graphics segment sales and without putting numbers on how how do you imagine that mix looking at him and in particular within that lighting business how much of it is outdoor versus indoor just conventional stuff.
Well, we don't usually we don't break up the indoor outdoor and we don't get into that specifics externally, but we certainly look at it indoor I mean internally and you know the the message to the team is listen.
We want to be leading with the products and the solutions in the market we different were most differentiated.
The lighting industry is very competitive and very tough industry. As it is we want every competitive advantage, we can bring to the market. So generally when we are when we have a project it's.
That is more heavily weighted to outdoor and indoor we enjoy the benefit.
When we started to get away from that balance and it becomes upside down we'll say was more indoor and outdoor we lose that competitive advantage that usually shows up in margin erosion or the quality of the earnings on that project.
But when I look at the whole thing when I look out two years three years, it's our mix and our focus on vertical markets. It creates the biggest differentiation for us.
We remain disciplined on that we remain connected with the agents that understand that we walk away from projects that are that we just don't enjoy a significant leverage and we don't enjoy.
Something differentiated and we take that time that we are creating we move it towards those projects, where we do and we put the effort into winning knows that's how we get there.
I.
Go ahead, sorry would it be fair to say, then and I heard a comment earlier that.
Yes, you are right now you've got this problem, where you can't you shut down your indoor business, because you've got some fixed cost absorption within the organization that you've got to cover so you cant just flip it but.
Over time, it kind of sounds like if you can slowly walk the business away from that segment, which isn't particularly margin accretive for you you you will do it it's just going to take a while is that a fair characterization.
Well I want to be careful because most of this stuff often comes back as a sound bite, we're not abandoning our I mean, we're busy.
All right so.
We will we want to be a solution provider to the vertical markets that we.
We have competitive advantages in and petroleum we referenced it a lot, but I'll just speak about the petroleum market, we want to be able to provide the outdoor lighting on the canopy, we want to be able to revive the cana the graphics across the whole canopy fixture of the pumps everything that the customer want we want to bring that towards the building and have the wall packs in the outdoor lighting around the facility itself and we want to go right into or right indoors with that and provide the indoor lighting interior graphics digital signage.
Thats a great example, automotive same thing.
Whether it's a car dealership or rental car or you know kind of a newer.
Car sales efforts out there like carmax or whatever it is we want to be on the outside with our exterior lighting, we want to go right into the showroom was specific whiting that made in conjunction are designed in conjunction with the requirements of the customer and we want to go right back into the service Bay area with the proper lighting to help them in the back whether its paint or whether it's.
Finishing areas or whether its mechanical areas where.
Under the under carriage lighting.
Good lighting from above all of those type of solutions. So we are we are definitely not abandoning lighting, but when we look at interior lighting, rather, but when we look at a project like let's say.
A hospital city hospital that has or an office building might be a better example that has very limited outdoor exposure and has just floors in floors of lower value interior lighting.
It's not necessarily that if that customers are partner of ours, we won't help provide a solution there I'd much rather take that science same time and effort and put it into one of the vertical markets were in or a customer that has a bigger balance of interior and exterior lighting.
Okay I get it that that's helpful. Thank you.
Just on the capital structure point, obviously, you're Delevering got great. You are kind of an unusual company in so far as you are de levering, but you're paying a dividend, which I think is great.
How.
How do you ultimately think about.
Capital structure do you want to you want to make this a zero debt company and convince people that the dividends well covered or do you want to be maybe a little bit more efficient and continue to de lever the balance sheet a bit how how do you think about what that progression should look like.
Yes, Hi, Joe Jim Police here, we have Jim, Yes, we monitor and maintain various models on our capital allocation.
Perspective, and we do value, particularly right now the the dividend as a key part of that but it really depends and as we go forward on on certain both organic and inorganic opportunities.
Right now the the ability pay dividend and reduce debt is also not restricting.
Our ability to continue and invest in the business, you'll both from a capital point of view and both from a operating standpoint of view, particularly in the in the commercial area. The business as we move forward and if we see certain very large initiatives that we want to pursue either organically or in organically that may that may change the alignment of that model a bit.
But I will say this just for clarity as Jim Clark again.
Part of our capital allocation model, specifically address our ability to pay dividends. It's always at the board's discretion, we meet at the management team, we have our recommendations, but I can tell you that we have very tight alignment with how our capital allocation models laid out right now and it does include the continued payment of dividends.
Sure sorry, if I kind of like your take on board, what I, what I think I'm hearing. It's look you know organic way, we're going to continue to de lever the business and get.
Shareholders comfortable with the fact that this dividends wallcover should some opportunity on the inorganic side present itself that would might involve re levering the business that would be okay, but but that wouldnt that that's not necessarily something that's that's that's in the plan all other things being equal we should expect to see the balance sheet continued to de lever is that right.
I think you're right on Lake like Jim said, we're not constrained right now and the things were looking at in the things. We're doing we're not constrained in paying the dividend doesn't put any pressure on us.
But if a great opportunity came up buyout inversely think every shareholder out there would say hey, you know what that's a great project Thats a great program Thats, a great opportunity whatever it is all forgo a dividend if thats what they think is best.
But that isn't even on the table that is even on the table at this point.
Okay I got it well. Thank you very much for your answers I appreciate it have a good day.
You're very welcome. Thank you.
Thank you ladies and gentlemen, this concludes our question and answer session for today. So now it is my pleasure hand, the conference back over to Mr., Tim Clark, President and Chief Executive Officer for closing comments or remarks.
I just wanted to say thank you again for participating listening to our call and having Ellis I on your radar I think we're making great progress Q4.
Obviously, we would like to see.
We'll continue to do this and that's our plan is to you know to have additional quarters, just like we did here in Q4.
I mentioned that to all the folks we meet with on a regular basis, we're always available if you.
We'd like to come and meet with us or visit our facility. Please feel free to contact us.
Thank you very much for that for the time.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect everybody have a wonderful day.