LSI Industries Inc. (NASDAQ:LYTS) Q4 2023 Earnings Call Transcript

LSI Industries Inc. (NASDAQ:LYTS) Q4 2023 Earnings Call Transcript August 17, 2023

Operator: Greetings, and welcome to LSI Industries Fiscal Fourth Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jim Galeese, Chief Financial Officer. 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 ‘23 fourth quarter and full year results. In conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website at www.lsicorp.com. Information contained in this presentation will be referenced throughout today’s conference call. Included are certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of GAAP and non-GAAP results is contained in our press release and 10-K. Please note that management’s commentary and responses to questions on today’s conference call may include forward-looking statements about our business outlook.

Such statements involve risks and opportunities and actual results could differ materially. I refer you to our safe harbor statement, which appears in this morning’s press release as well as our most recent 10-K and 10-Q. Today’s call will begin with remarks summarizing our fiscal fourth quarter and full year 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’ve likely seen by now, we had a solid fourth quarter and a very strong close for the year. This year’s performance, along with the strong performance over the last few years, is thanks to the work and effort of 1,600 or so team members at LSI. It’s also thanks to the efforts and confidence of our agents, our partners and the vast network and number of customers we serve. Our customers, agents and partners trust LSI to be their partner of choice to deliver high-quality solutions that help their business grow. I could not be prouder of the contributions of so many in help us achieve a real milestone in the history and journey of LSI.

Just about 4 years ago, we developed and published a goal of being a $500 million company with double-digit EBITDA performance in 2025. I’m happy to say that we have wholly met that goal as we finished the year just shy of $500 million and just over $52 million of EBITDA, and we did that a full 2 years earlier than our plan. We finished this year in a very strong financial position as we generated over $46 million of free cash flow for the year and reduced our net debt to about $35 million. It’s quite an accomplishment for a company that was struggling to hit $300 million in sales and $15 million of EBITDA just 4 years ago. As many of you know, we published an updated plan back in March which we call our Fast Forward plan. It outlines our road map to get to $800 million in sales and nearly $100 million in EBITDA performance in 2028.

The plan isn’t ambitious as our original plan to hit $500 million in sales. But this time, we’ll be doing it with the advantage of a seasoned team of folks on our management team right through our sales team, manufacturing floor and operations team. Much like our original plan, it calls for a balance of growth through organic activities and M&A. It continues to focus on our strategic initiative of zeroing in on high potential vertical markets, such as grocery, c-store, warehousing and manufacturing, automotive and sports courts, among others. And it allows us to deliver a variety of goods and services to those markets. Those goods and services are differentiated. They are designed and developed to serve those vertical markets in a way that commodity and catalog offerings cannot and they provide value to our customers that help them run their businesses.

Over the past 5 years, we have regularly been introducing more than 20 new products each and every year. Last year, our spotlight product was the LSI REDiMount. The REDiMount allows our customers and our installers, the opportunity to install our award-winning canopy lighting solutions more efficiently and with less time and cost to them. In addition, it allows for vastly simplified installation service and upgrade process and it creates a long-term relationship with our customers in which everyone benefits. This year, in 2024, we will continue that pace of development and innovation with the introduction of more than 20 new products again and with our flagship solution being a next-generation environmentally friendly, refrigerated display solution that uses no ozone-depleting chemicals.

This product will move away from man-made refrigerants into an organic gas refrigerant that has a zero ozone-depleting footprint and virtually no global warming potential. We are in the process now of adding an additional manufacturing facility in Maine that will house this R-290 solution with the goal of taking orders in Q2 and delivering first generation products in Q3 of 2024. Our digital menu board division continues to gain interest in orders from an ever-expanding base of customers. 3 years back, we were fortunate to be awarded a $100 million project to install outdoor digital menu boards across the country for one of the world’s largest quick-serve burger chains. We have wholly completed that project with a very satisfied customer and we’ve made a significant name for ourselves as a quality supplier and partner that can manage not only the design and manufacturing of the solution, but also the project management, installation and post-sale support.

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With that, we have a small but growing revenue – recurring revenue associated with this ongoing remote content management and services, and we continue to differentiate ourselves as a company as a full solutions provider. With an oversized award like this project, there has to be a lot of work done to fill the gap once things are complete. And I’m happy to say our sales and design team have done an outstanding job of doing just that by infilling ongoing activities of that $100 million order with a variety of customers from burgers to chicken, Chinese food to tacos. We’re very excited to continue to expand this solution, and we think in the long run, digital displays will find a place in other areas of our vertical marketing strategy. Our Lighting division continues to innovate and expand its product and services offering.

LSI has always been known for its industry-leading outdoor lighting and advanced control solutions. But it’s also always had a very robust indoor product lighting offering. Our ability to deliver these solutions to the vertical markets we serve has continued to pay dividends for LSI, our customers and our investors. We believe LSI has a lot of runway left. We have a team of folks that are ready to continue our growth in lighting, digital and print displays, refrigerated solutions and our expanding base of project management and service solutions. We have a well thought out strategy and a plan to grow that is adaptable to changing market conditions and competitive forces. We feel confident in our ability to manage and seek out continued productivity and cost opportunities while managing price, margin and cash flow.

With that, I’ll turn the call over to Jim Galeese, who will provide additional details on our fourth quarter and full year performance.

Jim Galeese: Thank you, Jim. A solid fourth quarter capped a successful year for LSI. In summary, fourth quarter operating income increased 43% year-over-year on sales of $124 million. The business generated $14 million of adjusted EBITDA in Q4, 33% above last year and continue to realize margin expansion with adjusted EBITDA margin of 11.4%, 310 basis points above last year. Fourth quarter reported earnings per share were $0.28, with adjusted EPS at $0.30. This compares to $0.18 and $0.21, respectively, for the prior year quarter. Improved profitability combined with a lower fourth quarter effective tax rate drove the increase. The lower tax rate contributed $0.04 to reported EPS and $0.03 to adjusted EPS. For the full fiscal year, sales increased to $497 million, representing 9% year-over-year growth.

Adjusted net income increased 61% to $29 million. Adjusted earnings per share increased 55% to $0.99 per share. This represents the company’s highest full year EPS in over 20 years. Full year adjusted EBITDA increased to $52 million, with the adjusted EBITDA margin rate expanding 270 basis points to 10.4%, and all quarters showing considerable improvement over prior year. Our significantly improved earnings and working capital efficiency generated full year free cash flow of $46 million. Cash generation was positive throughout the year culminating with fourth quarter cash flow of approximately $16 million. Strong cash flow was applied to reduce the level of outstanding debt. We reduced debt by over 50% in the last 12 months to $35 million, lowering our ratio of net debt to trailing 12-month adjusted EBITDA to 0.7x.

Lower debt was a capital allocation priority in fiscal ‘23 and provides the balance sheet flexibility to pursue both organic and inorganic growth initiatives as outlined in our updated 5-year strategic plan. A regular cash dividend of $0.05 per share was declared, payable September 5 for shareholders of record on August 28. Now a few comments on segment performance. Lighting growth continued in Q4 with sales increasing 5% representing the ninth consecutive quarter of growth compared to the prior year period. Growth reflects ongoing healthy activity in our key vertical markets, particularly parking applications, warehousing and automotive. For fiscal year ‘23, lighting sales increased 17%, with double-digit growth achieved in both indoor and outdoor applications.

Our assessment is that we are taking share and outperforming the market, a combination of our expanding position in key markets and the overall vitality of these priority verticals. The lighting gross margin rate improved to 33% in the fourth quarter and the full year margin rate improved to 32%, 190 basis points above last year. We entered fiscal ‘24 with a project Quotation Level Steady at a high level and Q4 bookings were favorable with a book-to-bill ratio above 1. We are seeing some slowing in large projects, but small and medium project activity remains healthy. We continue to experience lengthening quote-to-order conversion periods, but these are holding steady. These are committed projects, but because of financing and budgetary purposes, final specs and product requirements are constantly being modified, delaying order release.

Pricing remains steady and material input costs vary by commodity, but overall input costs remain aligned with pricing. As expected, fourth quarter Display Solutions sales declined versus the prior year as the prior year quarter was a peak period for our large digital menu board order. Full year Display Solutions sales increased 1%, but sales increased 13% when excluding the digital menu board order, reflecting the ongoing strength and investment in the grocery, refueling c-store and QSR market verticals. Full year Display operating income increased 43% and realized significant margin rate expansion with the gross margin rate improving 470 basis points and operating income improving to 11.6% of sales. The mix of higher-value applications, along with improved program pricing, drove the rate expansion.

We enter fiscal ‘24 with very active customer inquiry levels for branding and image initiatives, particularly in the refueling c-store and grocery space. In addition, we are experiencing very high interest in our new refrigerated-display case product scheduled for launch in Q3 of fiscal ‘24. We will begin taking orders late in fiscal Q2 for shipment beginning in fiscal Q3. In summary, it was a solid quarter and fiscal year for LSI. We enter fiscal ‘24 well positioned to build on this success. The market is steady at a healthy level and will support our commercial efforts with continued strong operational execution and effective margin management. I will now return the call back to the moderator.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Aaron Spychalla with Craig-Hallum. Please proceed with your question.

Aaron Spychalla: Yes. Good morning, Jim and Jim. Thanks for taking the questions. First for me, I saw in the deck, you kind of talked about the second half of FY ‘24 being stronger than the first half. Can you just talk about some of the factors that go into that? And then just more broadly on the market that you’re in, seem to be a little more insulated from the macro and have had good CapEx trends. Can you just talk a little bit about paybacks or return on investment or just other factors that customers are looking at when evaluating Lighting and Display versus other projects?

Jim Clark: Good morning, Aaron. Thanks for the question. Thanks for getting on the call. Yes, I mean, we’re not shielded from anything any more or less than anybody else. But as we’ve talked before kind of in this form and others, we selected our strategy is really based around vertical markets, and we want to be more to fewer as opposed to something to everyone. And within those vertical markets we picked, we look for how we can add value to our customers’ businesses and help them improve their overall function as a business. And then also how they would respond to any kind of external macro pressures and things like that. So the markets that we’ve picked are generally aligned with that. They’re not immune, but they’re more resistant, if you will.

So as you look at across our vertical markets like grocery or c-store or interestingly enough, automotive has just been on fire. We just thought that these are markets that will kind of move through the cycles of this in a longer-term and – but the customers will still invest and keep to their plans. And that’s proven out to be a pretty solid strategy over the last 5 years or so. In terms of strength in the second half and for us, I just mentioned it a few minutes ago, we’re going to be introducing some newer products probably at the top of mind this year is the introduction of our 290-Refrigerated solution. it’s a zero ozone, zero global warming contributor. And it’s a product we think is going to have a lot of demand and we have a lot of opportunity with it.

So we see that as being a real growth driver in the second half. And then lastly, I would say that you’re aware of the seasonality we have where these numbers right now reflect Q4 participation, we’ll have the Q1 participation. But the winter months are from a seasonality perspective are usually a little bit lighter on us. It’s got nothing to do with demand or interest or lost deals or anything. It’s just the reality of doing exterior installations and such during winter months.

Jim Galeese: And Aaron, Jim Galeese here. The only thing I would add to that, Jim, covered it very thoroughly is we mentioned about the lengthening quote-to-order conversion rate that started sometime in Q3 and is continuing. So that will affect us from out the door more in the first half. That will be the norm and stabilized and hopefully, condensed a little bit by the second half of the year. So that will be more in a normal operating environment.

Aaron Spychalla: Right. Right. That makes sense. And then just second on margins, great job, obviously, to date, and you talked about some of the runway that’s left there. Can you just provide a little bit more detail on some of the key levers and just how margins might progress as we think about FY ‘24?