LSI Industries Inc. (NASDAQ:LYTS) Q1 2024 Earnings Call Transcript

LSI Industries Inc. (NASDAQ:LYTS) Q1 2024 Earnings Call Transcript November 3, 2023

Operator: Greetings, and welcome to LSI Industries’ Fiscal First Quarter 2024 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Galeese, Chief Financial Officer. Thank you, Mr. Galeese, you may begin.

Jim Galeese: Good morning, everyone, and thank you for joining. We issued a press release before the market opened this morning, detailing our fiscal ’24 first quarter results. In addition to this release, we also posted a conference call presentation in the Investor Relations section of our corporate Web site. 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 GAAP and non-GAAP results is contained in our press release and 10-Q. Please note that management’s commentary and responses to today’s questions on today’s conference call may include forward-looking statements about our business outlook.

Such statements involve risks and opportunities and actual results could differ materially. I refer you to our safe harbor statement, which appears in this morning’s press release as well as our most recent 10-K and 10-Q. Today’s call will begin with remarks summarizing our fiscal first quarter results. 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.

Jim Clark: Thank you, Jim. Good morning, all, and thank you for joining us today. As you have likely noted from our press release, we had solid results in our first quarter of fiscal year 2024. We continue to improve business operations in nearly every category and the commitment of our team and their ability to execute continues to be demonstrated each day. Adjusted net income for the quarter was up 23%. Adjusted EBITDA came in at 12.2%. We had an EPS of $0.29, which was up $0.04 from last year, and free cash flow was better than $9 million for the quarter, bringing our net debt to $25 million, while sales remained steady. As you may recall from my last call, I spoke about our Fast Forward plan at LSI. This plan outlines our business goals and objectives extending out the fiscal year 2028, and it is regularly shared with our entire management team and company personnel.

It is also posted on our Web site under our Investor Relations section. The plan has some ambitious goals in top line sales, margin performance, profitability, and the markets that we intend to serve. With any goal or acquired skill, you plan and practice your craft to advance to the point where you’re proficient in the execution and confident in your ability to repeat and control emotions and activities that advance you towards your goal. In some cases, progress is swift. And in others, it will require repeated effort in fine-tuning in order to advance. I’m sure that all of you have experienced a journey like this before. Anyone in the history tried to develop a new skill, a habit or advance towards some goal understands it’s the speed in which you progress can vary and external factors are always at play.

Along those lines, I wanted to remind everyone that our goal is to be an $800 million company with 12.5% adjusted EBITDA performance or better in 2028. The reason I point this out, this quarter, we achieved 12.2% in adjusted EBITDA for the quarter. This accomplishment helps demonstrate to the team at LSI that this level of performance is well within our REIT. And if we continue to focus and practice, we can sustain that level of performance and reach even further in the future. Now with that said, I want to remind you all that much like our path to 10% EBITDA, there will be ups and downs in our journey to 12.5% or better. Some quarters will be better than others, but we will learn from each. I do not expect that we will regularly perform at this elevated 12%-plus level just quite yet, but I do know that we can get there, and I think this quarter shows it.

As I look out short-term, we know that Q2 and Q3 are typically seasonally affected and lower utilization puts pressure on our margin. Last year, we had the best Q2 performance in the company’s history. In fact, it was our single best quarter ever. And as I mentioned in the past, we do not expect that every Q2 will be like that. In fact, I expect that we will have some settling and realignment this year. As I mentioned over the last four or five quarters, our quote activity remains at very high level, but our quote-to-conversion time has been extended, and it continues to be less predictable than it has in the past. Permitting issues have stabilized, but they’re still unpredictable. Supply from other trades, particularly electrical switch gear, remains unsteady and this slows project time.

Our Automotive vertical, which interestingly enough has had a very strong demand for the last few years is a bit less predictable right now, which I’m sure is connected to the Big 3’s labor negotiation. Our Grocery segment has a lot of potential and program interest, but is also a bit constrained right now due to a probable merger and divestitures and a seasonal pause that occurs as the holidays approach. As I look forward to the next few quarters, we have some challenges, but we also have some exciting and meaningful opportunities in front of us. We have a number of new products, new commercial efforts, a number of focused marketing programs and continued progress in our operational efforts. Last week, we were awarded the second phase of lighting in our ongoing involvement in the new EV power plant, battery manufacturing facility in Kentucky.

This award was even larger than the first award, and it goes to underlying customer confidence in our product quality and our ability to deliver. In addition, we also noted last week that we have been awarded a large 7,000 site multiyear brand refresh program for a major oil retailer. This is all good news, and it speaks well for continued opportunities in front of us. From an operational perspective, just yesterday, I was in our new Bangor, Maine facility. This is a location that will be responsible for the production of our new zero ozone-depleting R-290 refrigerated solution. I’m happy to say that things are progressing well. And as we stand right now, we will begin production in this facility and delivery in Q3. Customer interest in this product is high, and our team is excited to have this offering in our arsenal of solution.

I also had the chance to visit our Milo, Maine [indiscernible] facility. We’ve been putting time into reforming this factory, and I had the opportunity to see the results of our ongoing changes to our manufacturing process, which helps us to optimize production and reduce waste, improve margins, all while adding additional capacity and capability. Two weeks ago, I was in our Burlington, North Carolina facility. This location is responsible for our stock and flow lighting business, Atlas Lighting. We’re in the middle of what we call lighting season within this business, typically, this is the time of the year we see an increase in maintenance and repair of outdoor lighting in preparation for shorter days and longer nights as winter sets in across the U.S. This is an area where Atlas tends to shine.

There’s a lot of potential opportunity here and are very confident in this team’s ability to deliver and are looking forward to seeing the results of this coming quarter. Lastly, I want to make note that we have recently completed a number of changes to our print graphics division, Akron, Ohio, whereas over the summer, we consolidated print operations into our Houston, Texas plant, which we expect will yield a number of costs and operational efficiencies, along with increased capability. Our ADAPT project management group and our digital menu board program management team remains in Akron. All in all, we expect a strong year in 2024, but we are aware of a number of external factors that could affect timing and progress. Our Automotive vertical, our Grocery vertical and our work in warehousing could all be affected over the next few quarters as mergers, labor tax progress, and the holiday seasons effect project time.

We do not see any of these disruptions as structural risk, and we are confident that any impact would be limited to timing only. Our team is committed and innovative, and we expect to continue our journey to $800 million in 2028. I want to thank you all again for turning into the call. And with that, I will turn the call back over to Jim Galeese for a deeper look at our financial.

Jim Galeese: Thank you, Jim. For the quarter, LSI generated increased earnings and earnings per share, margin rate expansion, strong cash flow, and working capital efficiency. An increased gross margin rate contributed significantly to our improved earnings and margin expansion with the rate improving for both the Lighting and Display Solutions segment. Several factors contributed to the 260 basis point improvement, led by improved program pricing and moderating material input and operating costs. We exhibited strong commercial and operational execution in the quarter. Commercially, our team continued to work closely with partners and customers to exploit opportunities in key vertical markets, while operationally, we effectively manage the timing fluctuation of several programs.

Our supply chain capabilities continue to be an effective force for our business. Strong cash flow of over $9 million served to reduce net debt to $25 million and lowered our TTM ratio of adjusted EBITDA to net debt to 0.5x. This provides the balance sheet flexibility to support our capital allocation priorities, which include debt reduction, investment in organic growth initiatives, inorganic growth opportunities, and return of capital. Now comments on segment performance, for Lighting, Q1 sales obtained strong prior year levels as our vertical markets continue to generate favorable activity and reassess our share position growing. For Lighting, adjusted gross margin rate increased 110 basis points to 34.9%. Pricing, project mix, and favorable material input costs all contributing.

It was a strong quarter for outdoor project activity, led by high-value area lighting and parking garage applications. Operating expenses increased somewhat versus prior year, driven by planned investments and commercial growth initiatives. Q1 project quote levels for Lighting were 4% above prior year, despite fluctuating on a daily and weekly basis as opposed to conversion period remains lengthened. Project pricing across most verticals remain stable. Looking forward, we expect Lighting activity to remain steady in the near-term with Q2 sales at or several points above prior year levels. Moving to Display Solutions, adjusted operating income increased considerably on modestly lower sales. Operating income increased 19%, with the gross margin rate increasing a substantial 360 basis points.

Sales growth was realized across multiple customers in the refueling C-store and QSR vertical. Sales in Grocery slowed in the quarter as the pending merger of the nation’s top two grocery chains is causing timing disruptions on certain programs. The significant improvement in gross margin rate reflects our ongoing focus and effectiveness on program pricing and high-value mix. It was an eventful quarter for new activity highlighted by the program award from one of the nation’s largest oil company, to deliver a brand refresh for 7,000 domestic locations covering seven brand banners, all to be completed in 4.5 years, a challenging task. Our proven solutions and trusted long-term relationship with this customer positioned LSI as the partner of choice.

We were also awarded programs by several oil companies for brand conversions in six Central American countries and Jamaica. It’s pertinent to note the Archer and Forward Throw technologies referenced in our press release will be prominently applied in both programs, an example of innovative solutions to customer problem. We talk about the lumpiness and volatility of program activity and the 7,000 site program is a good example. This program has been in the gestation period for 14 months, beginning with our involvement in the concept phase to final award. While this program is very large, the cycle from our initial involvement to award on these custom programs can range from several months to well over a year. We have early concept involvement with many display solution customers, and the program proposal activity continues to advance in major verticals, including Refueling & C-Store, Grocery, and QSR.

Currently, in Grocery, we have several customers deferring major brand and image expenditures until there is clarity on the pending merger, the outcome and potential disposition involving hundreds of stores. While the broader outlook for our Display Solutions business is strong, the near-term will be impacted by grocery industry events. Entering the second quarter, we will continue to be diligent, again, focusing on commercial and operational execution, margin management, and cash. I’ll now turn the call back to the moderator for the question-and-answer session.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Aaron Spychalla with Craig-Hallum Capital Group. Please go ahead.

Aaron Spychalla: Yes. Good morning, Jim and Jim. Thanks for all the color and for taking the questions. First for me, you talked about — on the refueling opportunity can you just share a little bit more on the cadence of the rollout there? Is that pretty even or how might that look? And then you referenced on several new significant programs secured during the quarter. Any other details to share there based on size, end market timing, et cetera?

Jim Clark: Good morning, Aaron. And thanks for the call — thanks for the question and thanks for participating in the call. Yes, the refueling opportunity, I think, really goes to underlying something we’ve been talking about for some time, which is — remember, we’re trusted with the branding, with the identity of these locations. And if we went back just five years ago, we were talking about a 7- to 10-year refresh cycle. And we have been talking for some time about how we’re seeing that refresh cycle compress. And we’re now solidly into the five trending kind of 3% to 5%. And this particular customer, 7,000 locations, they just — we just completed a refresh program with them not long ago. It helps underline that we’re right at that five-year mark, where they look and they say, “Hey, five years is long enough.” So we just finished one — this one that we are — that we were just recently awarded is right now scheduled to be 4.5 years in length.

And it’d really be under their direction with us as a partner. But I think they’re very purposeful about how the timing of it. They’re going to take the sites that were just completed. Those sites will be on the tail end of this 4.5 years, and the sites that are 4.5 to five years old will be the first ones to update. So, we’re very happy about that. It’s a great program. It was a hard-fought win and one will fit right up our alley. The second project we mentioned was the second phase of the EV power plant. There’s a lot going on right now in the automotive industry, as you know. But this — we received the order early last week, and we’re very excited about that. It just goes to continue to underline our ability to serve very large projects to be local, to be domestic here.

We’re not looking at a foreign source supply chain or anything like that. We’re able to be a real partner on these projects, accommodate changes that may happen. Even things that may cause the customer to change their entire initial thought with our ability to manufacture here domestically, we’re able to really react to those types of things. I think it just goes to underline that a lot of customers are recognizing that value and we’re able to capitalize on it.

Aaron Spychalla: Great. Thanks for the color on that. And then, just second, the execution on the margins has been really impressive. Can you just kind of talk a little bit about some of the initiatives there you mentioned making the business more flexible based on this kind of demand timing, so any details there? And you kind of touched on it at the beginning, but just how might margins kind of progress this year just as we’re thinking about the kind of FY ’28 goals as well?