LSI Industries Inc. (NASDAQ:LYTS) Q2 2024 Earnings Call Transcript

LSI Industries Inc. (NASDAQ:LYTS) Q2 2024 Earnings Call Transcript January 25, 2024

LSI Industries Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.18. LYTS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to LSI Industries’ Fiscal Second Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jim Galeese. Thank you. 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 second quarter results. In addition to this release, we posted a conference call presentation in the Investor Relations section of our corporate website. 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 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.

Jim Clark: Thank you, Jim, and good morning all. Thank you for joining us on today’s call. As noted in our press release issued earlier today, LSI continues to perform well and in line with our expectations despite some temporary headwinds in our grocery vertical. In our Lighting segment, sales were down 3% for the quarter on prior year sales, while gross margin improved meaningfully to 35%. This performance both in sales and margin reflects our continued ability to manage the business and take share even while we are in a challenging year-over-year comparison and general business environment. Our quote and order activity remains high, up almost 10% from last year while our conversion rate from quote to sales remains extended but stable.

While the broader lighting market in many of our competitors have struggled to maintain top-line momentum, LSI has been successful in finding and creating opportunities for growth and we remain focused on profitable sales. In our Display Solutions segment, the headwinds in the grocery vertical have had broader impact as they have challenged momentum in our graphics, standalone displays and refrigerated products. This impact is more apparent when compared to our lighting segment. As we noted a few months back, we recently awarded a significant win in our Display Solutions Group in the refueling space with 1,325 sites set to span three years and another award that will include more than 7,000 locations averaging 700 to 1000 sites per year. This project will span considerably longer.

Our normal flow of business in this space and the overall refueling vertical feels very robust right now. In addition to these recent project wins, we are currently engaged with two major C-store customers who are multi-site testing our refrigerated product in a number of locations. In fact, a recent article published in last month’s Wall Street Journal underlines our thesis of continued growth in this segment and the solutions approach offered by LSI fits very well. The article is titled Gas with a Side of Pizza and it goes to underline the opportunity, the investment in the higher margin sales that accompany a traditional gas station by engaging in-store sales. We are very experienced and recognized in this space as a high quality solutions provider and we’re confident we will have continued notable wins.

Addressing the slowdown in the grocery vertical specifically, I would like to note that two of the largest grocery chains in the U.S. are currently engaged in a proposed merger. This merger has been under an extended federal regulatory review process and has caused a temporary slowdown across the entire grocery vertical as companies within this sector await the results of the review and the possible changes to the competitive landscape. Although it’s impossible to see what the future will hold in this space and the timing associated with the approval process, we anticipate that there will be continued growth and pent-up demand as the merger process moves forward. While we are disappointed with the time this process is taking, we believe that whether the merger occurs or fails to move forward, it will likely generate significant opportunity for additional business as the landscape continues to evolve and change.

These changes that help our customers engage and retain customers fit very well with the products and services LSI offers, and we will be prepared to serve this market now and into the future. On the new products front, LSI continues to set the bar in new product introductions and innovation. Staying on pace with our 20 plus new product introductions or product revisions each of the last five years, I’m proud to say that, our new R-290 environmentally sustainable refrigerated product was DoE or Department of Energy certified and UL approved earlier this month and our first article has already shipped to one of our customers. Interest in this product is very high and we anticipate continued growth with this solutions as customers test the effectiveness with R-290 in their own store environment.

Turning to our Lighting segment. We recently introduced two completely new lighting products, including our linear aerial outdoor lighting product and our new Peak Series High Bay light, which is a modular product that includes a rotatable light engine and lens that can be rotated 180 degrees in fixed 30 degree increments. These products not only expand our broad solution set, but allow our customers and agents to access unique lighting solutions that showcase their properties and their business. Next week, LSI will be hosting our National Sales Conference. This annual meeting provides an elevated forum for our sales, marketing, engineering and product development teams to meet, discuss, debate and create opportunities. This is a real learning experience for our team and our company and we always gain momentum coming off of this conference.

I’m proud of the work the team is doing and I feel we have a lot of opportunities in front of us. There is no question the impact across the entirety of our grocery vertical is causing some headwinds, but I feel the team has pivoted quite effectively to offset a majority of those headwinds and we are enthusiastic about the possible tailwinds we could experience, as this process works its way to conclusion. We have the capabilities and the capacity to respond and we are excited about the ongoing improvements to our business and the possibilities that lie ahead. With that, I will turn the call back over to Jim Galeese for a deeper look at our overall financial performance. Jim?

Jim Galeese: Thank you, Jim. Our fiscal second quarter results reflect ongoing strong execution in key vertical markets, while managing the expected temporary demand disruption in the grocery vertical. We maintained a steadfast focus on quality of earnings, including successfully managing selling price and product cost. These efforts generated a year-over-year 240 basis point improvement in gross margin and an adjusted EBITDA margin of 10.1% equal to prior year on lower sales. This resulted in adjusted earnings per share of $0.21 for the second quarter and for the first half of the fiscal year, earnings per share were $0.50 equal to the prior year first half. The business again generated over $7 million of free cash flow in the quarter, further reducing debt now under $19 million and lower the TTM ratio of adjusted EBITDA to net debt to 0.4x.

Our cash flow and debt position support our capital allocation priorities and provides the balance sheet optionality for future investments. One of those priorities includes investing in profitable organic growth. Investment in critical capital programs was over $3 million for the first half of for fiscal year. Investments were spread across both lighting and display solutions and included key machinery and tooling to support new products, increased operating capacity, throughput and productivity. In addition, we remain committed to a balanced approach for driving shareholder value, announcing a quarterly cash dividend of $0.05 per share to be paid on February 13th for shareholders of record February 5th. Now, a few comments on segment performance.

Momentum continues in our Lighting segment. Operating income increased 28% year-over-year on sales of $65 million or 3% below last year. We continue to outperform the broader market further improving our share position. The lighting gross margin rate improved significantly, increasing 440 basis points to 35% with multiple items contributing to the rate expansion. Items include a higher value mix, stable pricing, moderately lower material input costs, value engineering and manufacturing productivity. Lighting orders for the quarter were 10% above prior year. Increasing the backlog as we enter fiscal Q3. Quote activity remains favorable as our key verticals continue to generate higher activity rates than the broader non-resi construction market.

Our team has done an effective job managing the timing variability in the quote-to-order conversion cycle, constructing our supply chain and production planning to allow for fluctuating demand patterns. We expect lighting momentum to continue in the second half of the fiscal year. Moving to Display Solutions, second quarter performance reflects the disruption in project activity throughout the grocery vertical. We continue to work closely with our customers on project timing with several large projects in turnkey position waiting on release. We use this disruption period to prepare for the return to normal demand activity. Relocation and startup of our new refrigeration production facility is complete and operational. And as Jim mentioned, we received final UL approval on the new environmentally friendly R-290 display case.

The first customer unit shipped last week. Our backlog in the refueling C-store vertical has increased significantly in the last several quarters. In fiscal Q2, a large oil company awarded LSI the brand refresh program for over 1,300 locations. Program is structured for LSI to be the turnkey provider responsible for site planning through installation. We’re seeing an increasing trend in programs requesting or requiring turnkey solutions, as customers recognize the value of our comprehensive solution capabilities. Looking forward, we expect Q3 Display Solutions sales to increase modestly from Q2 levels, performance will vary by vertical with refueling graphics increasing as site release activity begins on several major programs. Refueling activity is projected to remain strong throughout calendar year ’24 and ’25.

As project release activity begins to occur, grocery sales will increase somewhat sequentially in Q3 from Q2, but remain below prior year. Grocery project activity is expected to accelerate in the fourth quarter and into fiscal ’25. Our focus and priorities for Q3 remain the same, advancing our strategic growth initiatives, exhibit smart, disciplined, business execution and effectively managing cash debt and capital allocation. The underlying trend for our target markets remain positive and we are confident in our plans moving forward. I will now return the call back to the moderator for the question-and-answer session.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Aaron Spychalla with Craig-Hallum Capital Group.

Aaron Spychalla: First, for me on, C-stores, good commentary on the move to fresh food that’s happening there and initial progress on the cross-selling. Can you just talk about, maybe how big that opportunity can be with those initial customers and over time as we look out a couple of years?

Operator: I believe the speakers were disconnected. I think they’re dialing back in now. Okay. Bear with us, and we will get the conference back. Get them back on. I believe our speakers are live. Please proceed.

Jim Clark: Apologies everyone.

Operator: Okay. Aaron, you can continue.

Aaron Spychalla: Appreciate the commentary on the move to fresh foods in that industry and initial progress on the cross-selling. Can you just talk about how big that opportunity could be for you, as we look out a couple of years? And then just separately on the 7,500 site awarded, I saw mention of that being 3.5 years instead of 4.5 years before. Can you just kind of talk about shortening refresh cycles there and if that project has started yet and just maybe some more details there?

Jim Clark: Yes, absolutely. Thank you for joining. Thanks for the call, and apologies to everyone on the line for the technical issue. We see the opportunity in terms of the expansion in cross-selling, particularly in grocery, C-store environment and a few others, quick-serve retail, with the combination of our graphics, lighting, display and refrigerated display solutions, as being very big. I mean, I don’t know how to quantify it or qualify it bigger than that, but we are talking about markets that are annually in the billions of dollars. By every measure, we’re still on aggregate a small player. Not that there’s necessarily a larger player than us with the aggregated solution that we offer, it’s just that the market opportunity is very big.

I don’t know how to quantify it over that, except to say again that it’s in the billions of dollars. In terms of the cycle time, in the projects we’ve won, there are two projects. I’ll just take a second to mention them specifically. There is the 1,300 location project, which is a refresh and that is scheduled and we have a firm commitment on a three year span. There is a second project which is over 7,000 locations and the goal is to get it done in 3.5 years, but factoring in some of the material challenges and some of the customer zone challenges and realistically kind of trying to set a goalpost for that. We think it’s going to be in excess of, it will likely be 700 to 1000 sites a year. And so it puts us in excess of five to seven years to get that done, but as we’re in the project, I think we’ll have more updates maybe annually or in a couple of quarters, we’ll get a better feel for the customer’s ability to move forward.

We think we can easily double the current number within our existing footprint and within our existing system. But again, it requires the cooperation of the customer and the sites to be available and all those type of things. So, it’s good news. I think that we’ll find out more in terms of the timing as we move forward.

Aaron Spychalla: And then just on grocery, your commentary on an increase slight in the third quarter, but accelerating into 4Q in 2025. Can you just talk a little bit about how much of this is coming from the new R-290 offering versus just overall activity starting to recover? And then just maybe thoughts on how big the two large customers are as a part of this recovery?

Jim Clark: Yes. So number one, let me just talk on the headwinds we’re facing, the temporary slowdown in the grocery vertical, if you will. It doesn’t — it isn’t specifically related to one or two customers. It’s really broad across the market that we serve. And I believe the reason being that should this FTC related review and etcetera continue to drag on. The uncertainty about who, from a competitor standpoint, who are you competing against. Are you competing against one of the newly merged stores? Are you competing against your known competitor? Are you possibly buying a location that they’re exiting? Are you competing against a location where they will exit completely? So, I think the impact or we believe the impact is much broader than just one or two customers.

It’s across a segment as the entire segment looks to see who will my competition be and how will I have to compete against them and where will I have to invest to compete against this new entity or the momentum that they’re likely to drive in this sector. So, right now for us the delays are strictly regulatory related and the progress on that is we just don’t have a crystal ball to see where that ends up happening. With that said though, whether things move forward or whether things move forward or whether they don’t, we believe that, there is pent-up demand and there is pent-up opportunity. We have — we are hopeful that regardless of the progress on this that things will continue to shake loose in the third quarter here, which we are already in, but certainly into the fourth quarter.