LSI Industries Inc (LYTS) 2020 Q4 法說會逐字稿

Greetings. Welcome to the LSI Industries Fourth Quarter and Full Year Fiscal 2020 Results Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host and CFO, Jim Galeese. You may begin.

Good morning, everyone. We issued a press release before the market open this morning, detailing our fiscal fourth quarter results. In conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website at www.lsi-industries.com. Information contained in this presentation will be referenced throughout today's conference call.

I would like to remind you 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 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.

Thank you, Jim. Good morning, all, and thank you for taking the time to join today's call. In our last earnings call, we discussed our third quarter results and the initial impacts of COVID-19 on our business. As LSI was deemed an essential business from the start, we made the decision early on to remain operational throughout the current challenge, creating a safe work environment and protection of our employees was mission #1 but we also worked hard at finding ways to not only remain operational, but actively look for ways in which we could add value to our customers.

Our U.S. manufacturing footprint and our previous work on diversifying our supply chain not only allowed us to continue to serve our customers with minimal interruption, but it also created an opportunity to pivot and provide some specific COVID-related support, including social distance Graphics and other products and services.

As you have likely seen from our recently released Q4 financials, and the actions and efforts of the entire LSI team throughout the year, in particular, through the current challenge of COVID-19 has allowed us to exit from our fourth quarter and our year profitably with increased earnings, continued expansion of our gross margin, lower operating costs, strong cash flow generation, and I'm happy to say the elimination of nearly $40 million in debt over the last 12 months. Note, LSI is currently debt-free.

One year ago, we started fiscal 2020 on a mission to shift our business away from commoditized, low-value products to higher-value solutions. We created growth in future opportunities in many of the vertical markets that we serve, including petroleum, parking, automotive, quick-serve retail and Grocery/Pharma.

Our team, including many of our partners, had the courage and discipline to walk away from low-value business and focus on markets where we bring a much higher value to our customers and our company and shareholders. This effort resulted in a 520 basis point gross margin improvement in Lighting for the fourth quarter and a 310 bps improvement overall for the year.

Although sales declined in the fourth quarter as a result of COVID-19, our adjusted operating income in Lighting was $2.9 million or 5% above prior year and $2.2 million in Graphics, up 64% versus prior year. Jim Galeese will provide further comment on our exceptional financial performance for the quarter and the year.

Now shifting my comments to fiscal year 2021. I'm encouraged by the pace and progress of our company and the participation of our entire team. While COVID-19 and the related headwinds may slow down our progress, the efforts and professionalism of our employees in adapting to the new reality of our current environment has been outstanding.

On the Lighting side of the business, in Q4, we completed the build-out of our product development and marketing team, and we introduced 7 new products, not including those introduced by Atlas, and more than 20 new products for the year in 2020. Under our current plan for 2021, we will introduce an additional 20 new products. These products and solutions reflect an alignment with our vertical markets and provide further differentiation from low-quality commoditized products.

The integration of an entry-level controls platform across our entire product line, the continued improvement in energy usage, coupled with higher output and improved visual comfort will add to the differentiation and value we frequently talk about.

Building on our plan of understanding our markets and separating ourselves from our commodity solutions, we will add 3 new vertical markets to our focus over the next year. When we complete these growth plans, along with our engineering, manufacturing, marketing and sales team, I feel we'll compete on a different level, and we'll earn the right to win in the markets we work in.

On the Graphics side of the business, we've experienced surprisingly minimal disruption to our ongoing and proposed future projects. Our customer commitments and plans have not changed significantly in the petroleum, Grocery, Pharma and quick-serve retail environments. We've had to work around deployment and installation schedules occasionally as COVID hotspots have emerged. But for the most part, it has been business as usual.

In Q4, we completed the move of our Graphics facility in our Canton Akron location. This new location has had an immediate improvement on our productivity, and we look to leverage this even further as we move into 2021 and beyond.

Although these are uncertain and unprecedented times, our outlook remains focused on the things we can control and the execution of well thought out strategic plans. We've made adjustments to reflect the environment, but we still feel as though we are in charge of creating the opportunities and continuing to build and grow our company. For those of you who regularly follow our company and our calls, I think the past quarter reflects our high stay due ratio and our commitment to execution.

We spent the last 18 months transforming LSI into a better performing company, and I believe our best days are -- still lie ahead of us. With that, I'll turn it back over to Jim Galeese for comments on our financials.

Thank you, Jim, and good morning, everyone. To summarize key fiscal fourth quarter financial statistics, net income was $1.5 million compared to net income of $900,000 last year. Earnings per diluted share were $0.06 versus $0.03 in the fourth quarter of fiscal 2019. EBITDA was $3.9 million versus $2.2 million in the prior year. As a result of the pandemic impact on construction activity, sales declined 22%.

On a non-GAAP basis, adjusted net income was $1.7 million compared to income of $100,000 in the same period prior year. Non-GAAP earnings per diluted share were $0.06 versus $0 earnings per share in the fourth quarter last year. Adjusted EBITDA was $4.5 million compared to $3.3 million prior year. A complete reconciliation of fourth quarter GAAP and non-GAAP results is contained in our press release and 10-K.

The company generated $11.5 million of free cash flow in Q4, eliminating all net debt, and resulting in a cash balance of $3.5 million at the end of fiscal 2020. This compares to net debt of $39.5 million at the end of Q4 fiscal 2019. Full year free cash flow was $47.1 million.

With the onset of COVID, the company implemented multiple actions to reduce costs on both an ongoing and an interim basis, contributing to our fourth quarter results. This included adjusting headcount required to support the COVID-driven lower sales, and reducing discretionary spending in all major categories of operating expenses. We continue to invest in new products and other commercial initiatives.

For the completed fiscal year 2020, adjusted net income was $3.2 million compared to $1 million in fiscal 2019. Adjusted earnings per share were $0.12 versus $0.04 for the prior year. Adjusted EBITDA was $15 million for fiscal 2020 and sales finished at $306 million. A regular cash dividend of $0.05 per share was declared payable September 8 for shareholders of record on August 31.

Moving to our 2 reportable segments. Fourth quarter Lighting adjusted operating income increased 5% to $2.9 million. The gross margin rate improved 520 basis points to 28.6% and operating expenses decreased 18%.

The increased margin rate continues an improving trend of the last several quarters, reflecting lower manufacturing fixed costs, the transition to higher-quality sales mix and recent actions to reduce operating costs. This also reflects the number of new and cost-reduced product launched in fiscal 2020.

Sales declined to $41 million for the quarter, influenced by the pandemic. However, recent book-to-bill activity has exceeded 1.0, an indication that construction activity is gradually recovering.

Shifting to the Graphics segment. Graphics generate a solid quarter with adjusted operating income of $2.2 million versus $800,000 last year. Sales declined 6% as the pandemic delayed installation schedules.

Operating expenses declined $1.7 million, reflecting the organizational restructuring that occurred earlier in the fiscal year as well as recent cost actions. The Graphics gross margin rate was flat to last year, reflecting the current mix of programs.

We exit fiscal 2020 with a strong Graphics backlog and do not expect any changes to our large multiyear customer program commitments. However, in the near term, we do anticipate project installation schedules may be extended due to pandemic related disruptions.

Lastly, our North Canton, Ohio relocation project was completed with the move seamless to our customer base. I'll now return the call back to the moderator.

(Operator Instructions) Our first question is from Amit Dayal with H.C. Wainwright.

I just want to first say congratulations on managing through this period with such positive results. In terms of the outlook for sort of next year, it looks like there are some interesting growth drivers in place for you guys, including new product launches. Could you give us some color on what type of growth we should potentially anticipate in fiscal '21, 5% to 10%? Is that reasonable? Or do you think you could come in even higher?

Yes. Amit, thank you for joining the call today, and thank you for the question and the comments. I have to be completely honest. Things are still in such a state of flux. It's very difficult for us to forecast what we anticipate our growth rate to be for the year.

I mean, I think we've put multiple scenarios down on paper, and we're really -- we're prepared and ready to pivot based on how the market reacts. As you know, there's so many factors at play and construction not being one small -- I mean, coronavirus not being one small element in that whole thing.

The way it affects our Lighting business, in particular, and even our Graphics business is disruption in our ability to do installations and things like that. Although we haven't had any projects cancel or anything, we have had some push out mostly because of flare-ups and hotspots and difficulty getting installations done and things like that.

I could only say that right now, given the visibility I have a month into our new fiscal year. I can't say anything. I just don't know to tell you the honest truth. But I will say that we're -- and I'll underline that we're prepared to pivot quickly depending on how growth and how sales continue to come in.

And I mentioned in my comments, we have a number of new verticals that we're going after. And so the combination of those 2 things are going to ultimately put us -- are going to bring us to the end. And whether that's flat or up or down, I think we'll know more as we continue to travel through the year.

Yes. So one question, Jim, I had on the new verticals. I don't know if you mentioned those. You said 3 verticals. Could you give us color on what those verticals are? And what kind of resources will you sort of be applying to make initial inroads in those areas?

Yes. So as I've spoken over the last 1.5 years or so, we wanted to make sure we got things right, and we built that better company before we built a bigger company. Despite the coronavirus and the environment in general, we're ready to make investments.

And I've spoken pretty openly in the last couple of calls about acquisitions and M&A activity that we remain committed to. But we're also making investments in sales and a couple of other areas. And so we're ready to make those investments to drive that growth.

I don't want to talk specifically about the verticals that we're going in because to be completely frank, what we're doing is we are in the process of validating -- we put together a list that's much greater than 3, but we're in the process right now of validating the momentum we can create in those markets and how those markets fit in the current environment right now.

So that's certainly something. It's all in the mix. But I don't -- I really don't want to say what those verticals are at this point, but they will pivot or they'll build on top of the successes we've had in the verticals that we do very well in now. Petro, auto, quick-serve retail, Grocery/Pharma being one that has been particularly strong lately, that type of thing.

Got it. And then just one last one for me. These lowered operating costs in this quarter, are these going to remain in place for the next few quarters? How should we sort of look to see where this is going to sort of come out in the next fiscal year on a quarterly basis?

Yes. I think structurally, we could maintain where we are, and there might even be some additional opportunity. But as I just said a minute ago, we are going to be very deliberate in making some investments right now. Kind of that thinking, while everybody is going north, let's go south. Or let me flip that around, while everybody's going south, let's go north.

So we are going to -- although we can continue to maintain those structural costs and that type of thing. We're going to be looking for ways of making some investments right now. So you might see some flux in that.

Our next question is from Craig Irwin with ROTH Capital.

This is Andrew on for Craig. I just want to say congrats on the quarter and especially deleveraging the balance sheet, you guys made some great progress there. My first question pertains to the Graphics segment.

It looks like you guys might be able to have some margin expansion in the upcoming year, especially as you progress along on these early-stage programs, assuming the environment opens up, and you can execute on some projects. Any commentary there on the margins and the outlook in the segment?

Andrew, thanks for joining the call. And I think you're spot on. We do see some opportunity there, obviously. I think that it goes without saying, and I'm sure that every call that's going on over the last few months is underlining the uncertainty of the environment. But given the normal world, we certainly see the opportunity.

When we're in early stage, we go through a learning process and an efficiency curve as we get closer to the project and that type of thing. A number of the projects we're working on currently right now, we've gone through that maturity curve. And so we are starting to see improved margins, and we do anticipate that we'll be able to continue to exercise that.

Obviously, that's offset with new projects that we bring in. So there's kind of a continuing cycle going on, but we definitely do see some opportunity. That coupled with the number of efficiencies we gained in the Canton Akron move and some other projects we've been working on.

Great. And then second question here, you might not be able to provide too many comments, but congrats on your book-to-bill back over 1. Have you guys been able to execute on some projects in Q1 that may have been pushed out into Q4? Is it still pretty just uncertain out there and things are just going day-to-day now.

No, we've absolutely picked up some projects in Q1 that were pushed from Q4, but I'll be candid, we have some in Q1 that are pushing to Q2. So it's kind of one hand gives and one hand takes away. So the good news, and I'll underline is that we haven't seen any significant disruption or cancellations.

Particularly, as I mentioned in my comments, and Jim underlined on the Graphics front, and this is not just isolated to our petroleum, but quick-serve retail, our digital menu systems in our print. Those have been very active, quite active, and we haven't seen any fallout in those.

Our next question is from Rick Fearon with Accretive.

Congratulations on a great quarter during challenging times. Just wanted to talk a little bit more about the gross margin improvement, particularly in Lighting. And then as it relates to Graphics, which sounds like a function of how projects are ramping. And was wondering if you guys had some gross margin targets by segment, if it's -- or if that's purely a function of the type of project that you're taking on at the time?

Rick, thanks for joining the call. And we definitely do have targets. I don't know if I want to broadly share them. We're working -- we're always looking for continuing improvement.

And I think there's room for us left here, early stage projects even in our Lighting side tend to -- we're willing to work with the margin and then find ways improve it through operating efficiencies and others, value-added services, additional offerings, either product or service offerings, we can give and those are what usually contributes to our margin improvement. I think we have room in all fronts even with our established customers to continue to kind of incrementally move that.

That's great to hear. I mean, it's -- what you've done thus far, Jim, is incredibly impressive. And yes, I know you inherited a stock and flow business that probably would not have been your first choice.

And it will be particularly interesting to hear about the new verticals that you and the team identify for future growth opportunities as that no doubt will factor into continued margin improvement. So -- but what you've done with the existing business is really impressive.

On the operating expense side, it's equally impressive. And just kind of on the SG&A front, last quarter, you outlined some improvements that are already showing through in this quarter's results. And do you see -- is there other low-hanging fruit for SG&A reductions? Or are we kind of at a good stage at this point?

So I do see -- I think that, as a team, we do see some continuing opportunity there. But as I was mentioning earlier, we're making a purposeful decision right now to take it and start doing some investments. So you may see some lumpiness in that. It may not -- we may -- it may turn out that we continue to get the incremental improvement and stuff.

But I also, at the same time, want to start making these investments I mentioned the expansion into some new verticals. So there's an expense associated with that as we get involved in there and we get the support material and we make decisions and test the various markets.

So in the simplest terms, I want to make some investments here. So it could put some pressure on that, but we still do see opportunities. If things worked out great, the opportunities would equalize the investments. But I want to leave a little latitude for the company and for our team to make sure that nobody feels any pressure to look past the potential dollar opportunities while we're chasing smaller penny, so to speak.

So I do definitely see opportunity for continuing SG&A reductions, but I also do want to make some investments. So we'll see how those 2 balance each other.

Yes, totally understood. And I'm sure some of those investments will be operating expense rather than capitalized expense. So that -- there is a -- there will be a lag, no doubt, with those investments.

If you -- when those are done and kind of when you get to that steady state, and I guess the assumption has to be before you've identified or moved into the new verticals. But with the existing business, do you have a reasonable sort of EBITDA margin target in mind? Or do you -- is that also going to be a function of diversifying into some higher-margin verticals?

So one of the things we talk about often is that trade off of that lower quality business for the higher quality business. Anything that we develop right now from a vertical standpoint, although it may have some initial costs associated with it to get us off the ground, our pursuit would definitely be in line with maintaining that growth on the margin, and ultimately, EBITDA margin.

So I think that our initial list and our initial approaches have been very mindful of that. So my expectation is that we'll continue to make incremental improvements on that.

That's great. So Jim, I know this is for you and the team, it's really about the blocking and tackling still. And so the results are speaking for themselves. But -- and I know you're getting great advice already on the Investor Relations side.

I was just wondering if you've given any thought to possibly hosting a webcast call or something of the sort to lay out or expand on your strategic initiatives when you and the team feel like you're prepared to roll that out. Is there some opportunity to get out there? I know in this environment, it's hard to do it in person, but even a webcast.

Yes. We certainly would like to do something like that. I'll be candid. As you probably know and most of the folks on this call, there's been a number of firms that have been trying to advance their standard conferences and stuff through virtual meetings and things like that.

We are -- we've been supportive of participating in the ones that we normally do, and we have. In fact just talked recently about doing some virtual type meetings. I can't say that I've advanced it -- we have advanced it much, Rick, at this point, but I hear you. And we certainly feel handicapped that we can't get out and talk about this message.

I mean, I will tell you internally, we feel like we're building some momentum here. Even with the headwinds of COVID and all the other things, I think the financial results of our fourth quarter and our year speak to that. And it is slightly frustrating that we're not able to have a party and get out and talk about these things a little bit. So we are -- we have been talking about those internally, but I will say that it hasn't advanced much.

Yes, understood. Congrats on the great results, and thanks for all the hard work on behalf of stakeholders.

Well, thank you. Thank you for taking the time to be on the call.

We have reached the end of the answering and -- question-and-answer session. And I will now turn the call back over to Jim Clark for closing remarks.

I just want to thank everyone again for getting on the call and spending a few minutes with us. I do think that -- I do want to acknowledge the efforts of the entire company, the employees and the team, the confidence of the investors in LSI.

I am -- when you think about the uncertainty and the challenges that were faced in the latter part of Q3 and Q4 and then I measured it against the results and our targets. So although we fell short of where we absolutely wanted to be, I think we're very proud of the progress we've made and the ultimate results that we've had.

Much to Rick's point just a few minutes ago, I wish there were a way that we could more broadly share this outside of just even this call, and we will do our best to make sure it's done. But I just am very happy with the progress we made. And I think that we've got a lot of opportunity ahead of us in 2021 and beyond.

But even despite these headwinds, we are very committed to growing the company, and we are excited internally about the opportunities that we've already put on a preliminary slate and the progress that we've been able to make so far.

I will look forward to speaking with each of you as soon as we can. And I want to thank you again for taking the time to be on the call. Stay safe, and we'll look forward to our next interaction. Take care.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.